Where the buck stops with Fannie, Freddie
James Lockhart, a longtime Bush friend, is leading the oversight of newly seized Fannie Mae and Freddie Mac.
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NEW YORK (CNNMoney.com) -- During the Vietnam War, James Lockhart served as a naval officer aboard a nuclear submarine, the USS George Washington Carver. His job these days might be even more explosive.
As head of the Federal Housing Finance Agency, Lockhart is in charge of Fannie Mae and Freddie Mac, the mortgage financing titans taken over by the government on Sunday. It's up to Lockhart - armed with powers granted by Congress in July - to keep the companies functioning amidst the worst housing decline since the Great Depression.
To be sure, the next president will determine the fate of Fannie and Freddie - and in the process likely replace Lockhart, 62, a high school and college classmate of President Bush. But for now, the buck stops with Lockhart, who oversees the companies' newly appointed chief executives: Herbert Allison at Fannie Mae and David Moffett at Freddie Mac.
Some, however, are questioning why Lockhart only a few months ago repeatedly said that the companies had adequate capital and that a government takeover was unlikely. These statements, which were echoed by Treasury Secretary Henry Paulson, have left some in Congress wondering how conditions at Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) changed so rapidly.
Lockhart said in an interview that both companies had recently told him they were having trouble raising capital as their investors increasingly lost confidence. It also became clearer that the companies would have to take additional writeoffs, build their reserves and maybe even start selling assets.
"A lot of things changed, but the overall thing was that the market just continued to deteriorate," Lockhart said. "There just wasn't any sign that they could raise capital to fulfill their mission."
Now that they are in conservatorship, Fannie and Freddie won't have to worry about access to capital. But big changes are likely in store for them.
Among Lockhart's initial tasks will be to reorganize the companies, appoint staff and promulgate new regulations, said Thomas Stanton, an attorney who wrote two books on Fannie and Freddie and lectures at Johns Hopkins University. He will also keep a close eye on the firms' capital levels.
Lockhart, soft spoken and gracious, is not likely to make any bold moves or statements, according to those who know him.
"He is more cautious than a lot of us might be," Stanton said. "That's probably good in his job. Fannie and Freddie are immensely powerful. When dealing with these institutions, you've got to be cautious."
During his two-year tenure as the companies' top regulator, Lockhart has shown that he can rein in the companies. By the time he arrived, FHFA's predecessor, the Office of Federal Housing Enterprise Oversight, had already issued a scathing report on Freddie and was close to releasing an equally damning report on Fannie.
Back then, OFHEO did not have a lot of power, experts said. The companies' minimum required capital levels were set by law, not the agency. OFHEO also had no say over the size of their mortgage portfolios, nor did it control their mission. This is why Lockhart campaigned for Congress to strengthen the agency's capabilities.
Using a combination of pressure and consent agreements, Lockhart tightened the screws on the companies, requiring them to clean up their internal controls and placing caps on the amount of home loans they could keep on their books.
"Jim didn't take any guff from the companies," said Bert Ely, a banking consultant and longtime critic of Fannie and Freddie. "He's a quiet guy, but he has a steeliness about him. He certainly kept the heat on them to get them cleaned up."
This is not the first time Lockhart has stepped in to head a troubled agency. In 1989, he was appointed by President George H.W. Bush to direct the Pension Benefit Guaranty Corp., which insures pensions. He dealt with the fallout from the collapse of the steel and airline industries, whose pension accounts were hundreds of millions of dollars short of funding.
When he stepped down from the pension agency after the Clinton administration took over in 1993, he warned that the agency's finances needed strengthening. Among the steps he advocated were increasing minimum funding requirement for at-risk companies and barring companies with underfunded plans from increasing benefits.
"He's a very competent man," said Peter Wallison, a senior fellow at American Enterprise Institute. "He's a straight-shooter who makes the right decisions."
Before coming to OFHEO in April 2006, Lockhart served as the No. 2 man in the Social Security Administration at a time when Bush was advocating the creation of private accounts.
Lockhart's friendship with Bush goes back to their teen years, when they both attended Phillips Academy in Andover, Mass. Their ties continued at Yale, where they in the same fraternity, and Harvard Business School.
A Connecticut native who is married with two children, Lockhart also spent many years in the finance industry. Between his federal stints, he co-founded NetRisk, a risk management software and consulting firm whose clients included financial institutions. He also served as a managing director at Smith Barney.
Before going to Washington, he served as treasurer of Alexander & Alexander Services, an insurance firm, and as assistant treasurer at Gulf Oil.
Lockhart points to his experience in the finance industry and at the PBGC - which didn't even have a system to collect premiums when he arrived - as qualifications to oversee Fannie and Freddie.
"I'm probably the only person ... who has gotten two government agencies off the [federal] high-risk list," he said, referring to the pension agency and Social Security's supplemental security income program. "Management is something I take very seriously to complement my financial background and restructuring background at PBGC." 
