Greenwich CEO William Frey Primed to Become the Lorax For Investors Without a Voice?

One of the most interesting stories we’ve been following in the world of mortgage crisis litigation has been the lawsuit filed by Greenwich Financial Services CEO William Frey against Countrywide Financial Corp., Countrywide Home Loans, Inc. and Countrywide Home Loans Servicing LP (all now part of BofA). As discussed in several prior postings, Frey has sued Countrywide on behalf of investors in subprime mortgage-backed securities for violating its securitization agreements when it agreed to large-scale loan modifications as part of its $8 billion settlement with Attorney Generals from dozens of states.

In going back and reading news coverage on this story, I came upon a story in the Wall Street Journal from December 1, 2008 that I had missed. The article, entitled “Mortgage-Bond Holders Get Voice: Greenwich Financial’s William Frey Challenges Loan Servicers Like Bank of America“, contains several quotes from Frey that reveal broad aspirations beyond this first lawsuit against Countrywide (thanks to for posting this article). According to the article:

Mr. Frey says he may negotiate with mortgage servicers on behalf of bond investors or file lawsuits against other mortgage-servicing companies. “This is an opening salvo,” he says.

The story instantly recalled images from my childhood of Dr. Seuss’ timeless masterpiece, “The Lorax.” For those who are not familiar with eponymous hero of the Dr. Seuss story, the Lorax was a diminutive but wise character who spoke for the trees because the trees had no voices to speak for themselves (you can find the text of the story here, but like most Dr. Seuss stories, the illustrations are indispensable). The story has been hailed as an “environmentalist classic,” but it could just as easily be considered an allegory about the consequences of unchecked greed and unsustainable growth, two familiar culprits of our current financial calamity. Amidst this modern tale of disaster, it would appear that Frey views himself as the Lorax, speaking for mortgage bondholders who had no voice in the Countrywide settlement. And the WSJ article reveals Countrywide may be just the beginning, as Frey intends to represent additional bondholders in disputes with mortgage servicers.
In Dr. Seuss’ tale, the Once-ler family of loggers ignores the warnings of the Lorax, who lacks any power to affect their actions, and the Once-lers continue cutting down trees until they have all disappeared. Whether the result will be the same for Frey and mortgage bondholders depends in large part on whether they have any power under the terms of their Pooling and Servicing Agreements with Countrywide to require repurchases of modified loans. But this raises an interesting question: how did Frey gain the authority to become the spokesperson for mortgage bondholders in the first place? Surprisingly, the WSJ story suggests that Frey may not have even had standing to contest Countrywide’s settlement until he began acquiring affected securities:

Mr. Frey didn’t initially hold any of the Countrywide bonds that are the subject of the settlement. But in the past month he set up a distressed-bond fund that, he says, contains “substantial holdings” in Countrywide bonds. These bonds were transferred into the fund by one investor who wanted to challenge the company’s actions while staying out of the spotlight. “This is a vehicle designed to put me in charge of resolving these pools,” Mr. Frey says. Mr. Frey and his attorney, David Grais, decline to name the investor or provide information about the size of the fund or whether Mr. Frey himself had invested any money in it.

So, let me get this straight: Frey is actually the spokesperson for a wealthy investor, who in turn has transferred bonds that were the subject of the Countrywide settlement to Frey so that he could have standing to represent a larger class of aggrieved bondholders. Hmmm… not only is it clear that Frey is no Lorax, but this mysterious investor behind the Greenwich lawsuit may not be driven by a higher moral calling, either. After all, if Greenwich is able to prevail and force Countrywide to repurchase the subject loans at face value, this clandestine investor would receive a financial benefit compared to the current depressed value of the bonds (or perhaps this investor actively purchased these bonds hoping that he’d realize a profit as a result of a successful outcome to the Greenwich litigation). Thus, it appears the mantra repeated by the Once-lers to justify exploiting the environment and by mortgage originators and banks to justify massive expansion of their lending programs, may be the same mantra underlying Greenwich’s challenge to the Countrywide settlement: “business is business, and business must grow.”

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