WASHINGTON — After the Treasury Department said Wednesday that Secretary John Snow had mistakenly bought and sold more than $10 million of government-sponsored enterprise debt while in office, most observers initially predicted the disclosure would be a temporary embarrassment.
But questions surfaced Thursday about the Treasury’s legal defense of the move that could draw more attention during the Treasury inspector general examination requested by Mr. Snow.
At issue is whether he broke ethics rules by holding bonds issued by Fannie Mae, Freddie Mac, and the Federal Home Loan banks at the same time he was testifying and giving speeches about reining in those companies.
In a conference call with reporters a Treasury spokesman said that Mr. Snow had told his financial advisers to purchase Treasury debt, not GSE debt, and that he was unaware that he held such instruments until he was preparing the financial disclosure form due in mid-May. He became aware of the purchase May 10 and sold the debt four days later at a loss of a little under $500,000, the spokesman said.
Such a mix-up probably would be excused under federal ethics rules, so the initial reaction was low-key.
“I don’t sense this was deliberate,” said Bert Ely, a consultant in Alexandria, Va., who is critical of the GSEs. “The statements that he made repeatedly in hearings and speeches were against his interest as an owner of GSE debt, and that is evidenced by the fact that he sold it at a loss. … I think this will blow over.”
However, some observers were puzzled that the Treasury gave a different legal defense of Mr. Snow’s actions. A May 18 memo from Kenneth R. Schmalzbach, the Treasury’s assistant general counsel and designated ethics official, said that ethics rules were not violated because Mr. Snow’s transactions had no “direct and predictable effect” on GSE debt.
Industry observers and market analysts found the legal argument hard to accept. Mr. Snow has been a key player in the Bush administration’s push for legislation to create a tough regulator of the GSEs.
The cabinet secretary has repeatedly said that GSE debt should not be considered backed by the government, though many investors believe it carries an implicit guarantee. Treasury officials have also threatened to limit the debt issuance of the GSEs.
Observers said that all of these statements have had an effect.
“It’s been our observation that a series of statements by Secretary Snow and others at Treasury have had a cumulative negative impact on agency debt valuations in the market,” said Jim Vogel, a senior vice president at First Horizon National Corp.’s FTN Financial Capital Markets, who said that he had not seen the Treasury legal memo.
But Mr. Schmalzbach argued in the memo that debt instruments were significantly less sensitive to changes in value from “external matters than are equity securities such as common stocks.” He said he could find “no causal relationship” between times when Mr. Snow spoke and the GSE debt value moved.
Still, some observers questioned why the Treasury failed to reiterate its argument that Mr. Snow did not commit an ethics breach because he did not know he held the securities. Some said that it could be difficult for Mr. Snow to argue legally he did not know he owned the securities since his financial advisers sent him several financial statements.
A Treasury spokesman said Wednesday that Mr. Snow “simply did not look at” the statements, and said Mr. Snow regretted the misunderstanding that led to purchasing the GSE debt.
