By Nate Raymond 

In October 2011, three months before President Barrack Obama announced a Justice Department-led task force to investigate banks that packaged mortgage-backed securities, Representative Darrell Issa (R-Calif.) received a letter from the Federal Housing Finance Agency critiquing the government's ability to bring such a case.

The seven-page letter, signed by the general counsel of the agency that oversees Fannie Mae and Freddie Mac, was not flattering in its assessment of the Justice Department's prosecution of MBS cases. Alfred Pollard, the general counsel, wrote that "few government attorneys possess expertise in mortgage-backed securities." He also expressed concerns that resource and budget restraints would prevent the Justice Department from tackling cases involving complex financial instruments. That's why, Pollard said, the FHFA turned to private lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz Benson Torres & Friedman rather than use the government's own lawyers in 18 suits against banks that sold Fannie Mae and Freddie Mac $200 billion in mortgage-backed securities.

Pollard's letter, which was marked confidential and has not previously been reported, was sent in response to a demand for information from Issa, the chairman of the U.S. House Oversight and Investigations Committee. Issa wanted to know why the FHFA hired private lawyers rather than relying on the Justice Department, a question that is still highly relevant as the government begins to bring civil fraud suits like the one filed Monday against the credit rating agency Standard & Poor's.

Enforcement agencies, after all, continue to investigate mortgage-backed securities and mortgage-referenced collateralized debt obligations. Yet critics such as securities law professor John Coffee of Columbia Law School have argued that the agencies might obtain better results if they followed the lead of the FHFA and hired private lawyers. While Coffee has focused this argument on reforming the U.S. Securities and Exchange Commission, he said it could also be applied to the Justice Department, which, compared to a law firm, doesn't "have the capacity to throw 30 attorneys at a case."

The FHFA, according to Pollard's letter, hardly even considered using the Justice Department to prosecute its securities claims against the banks that sold MBS to Fannie and Freddie. The agency made what Pollard called "a courtesy phone call" to Tony West, then the head of the civil division, before the suits were filed. FHFA also spoke with the office of Manhattan U.S. Attorney Preet Bharara, but not about bringing its securities action suits, Pollard wrote. (Bharara's office has since sued several banks for violating the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act over loans sold to Fannie and Freddie.)

Pollard informed Issa that the FHFA's civil suits required not only litigation expertise but also an "in-depth familiarity" with mortgage-backed securities. "Only private law firms have both," he wrote. He also said that the FHFA expected its counsel in the bank suits to marshal resources and put in long hours under tight deadlines. "Government agencies, bound by strict budgeting and personnel requirements, are often unable to do that for sustained periods," he wrote.

Quinn Emanuel was an obvious choice for FHFA, Pollard said, because it was "one of the few premier" private firms involved in MBS litigation and had already been hired by Fannie Mae to evaluate Fannie's litigation options. After the agency determined that it needed a second private firm, it considered several candidates. That process led to the selection of Kasowitz.

The letter Pollard sent to Issa attached the FHFA's fee agreements with both private firms, but Issa's office did not provide copies of the attachments. Caitlin Carroll, a spokeswoman for the oversight committee, said Quinn Emanuel and Kasowitz are both being paid on an hourly basis. From August 2010 to November 2011 (before most of the bank suits were even filed), the FHFA paid its private lawyers an estimated $16.5 million, according to the oversight committee.

The FHFA has repeatedly declined to comment on its fee arrangements with Quinn and Kasowitz, and a spokeswoman for the agency, Stefanie Johnson, again declined Tuesday. "The letter speaks for itself," she said, adding that the agency doesn't comment on ongoing litigation. Philippe Selendy of Quinn Emanuel and Marc Kasowitz of Kasowitz Benson declined to comment, and the Justice Department did not have an immediate comment. 

(This story has been corrected to adjust the dates for the FHFA spending $16.5 million in attorneys' fees. This took place through November 2011, not November 2010.)

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