Posted on 02/28/2002 8:01:29 AM PST by lds23
We've learned over the years that the more outrage an editorial inspires the closer we were to the bull's-eye. So we figure our aim must have been good after Fannie Mae and Freddie Mac reacted to our editorial last week as if we'd insulted their mothers.
The two biggest U.S. mortgage holders hit the airwaves to denounce us, accused us of bias against "housing" (as if we don't live in houses ourselves) and unleashed their favorite Wall Street cheerleaders to deplore our ignorance. But something else happened too: Fannie's share price took a hit on the day our editorial appeared, and all sorts of other people wrote to say keep it up.
Clearly we've touched a nerve, so let's touch it again by considering Fan and Fred's frantic objections. For example, their derivative position. In 2000, these two leveraged giants owned up to $780 billion worth of derivatives. More recent figures from 2001, however, put that total at $1.4 trillion, with $1 trillion alone held by Fred.
Why all these derivatives? Derivatives are used to hedge risk, of course, and Fan and Fred need to hedge their big debts that expose them to credit and interest rate risk. But derivatives also carry the risk that the counterparty will fail to pay. Since Fan and Fred don't disclose the names, or much else, about their counterparties, it's impossible to judge counterparty risk. Readers of footnote 13 to Fan's financial statement in 2000 learn that 99% of their derivative exposure is covered by only five mystery counterparties. The footnote says that these five are A-rated or better; in other words, most of the companies are weaker than Fan, which is triple-A rated.
Our effrontery was to say that more disclosure might be in order. But when we saw Fannie CEO Franklin Raines's defense, we understood the problem. Mr. Raines seems to be under the impression that if something is recorded as an off-balance sheet liability, it doesn't count. He claims that the only liability that counts is Fan's on-balance record in 2000 of $643 billion. That leaves $707 billion in liabilities residing off-balance sheet. Hmm. Perhaps Mr. Raines is a graduate of the Andrew Fastow School of Accounting: outta sight is outta mind.
Fan and Fred defend their financial disclosure by quoting from Moody's Investors Service, one of the nation's bond-rating agencies. So we looked at what Moody's actually said. In a three-page paper -- not a rating report -- issued in October 2000, Moody's noted that Fan and Fred had been under increased financial and political scrutiny over their growing debt and the adequacy of their regulatory supervision.
While Moody's welcomed Fan and Fred's initiatives as a way of reducing political risk, it did not say that Fan and Fred's disclosure was excellent or even sufficient. Using the subjunctive case, Moody's said that Fan and Fred's decision to improve disclosure "could prove difficult for other firms to ignore, and could usher in a wave of enhanced risk disclosure" and "may prove to be one of the more important" initiatives. Coulda, woulda, shoulda.
Moody's more recent analysis, published at the end of 2001, is more definitive and not to the good: Under "Weaknesses/Challenges," Moody's flagged Fan's "exposure to significant asset-liability and credit risks" and noted that Fred's "exposure to mortgage prepayment and credit risks is significant and complex." Mr. Raines might also want to turn to page four of the Freddie report, where Moody's says the siblings' total 2000 obligations are $2.6 trillion, the very figure that Mr. Raines denies. In short, Moody's comes closer to making our case, not his.
Fannie and Fred's shrieking response to us, we should add, isn't unusual. They wield enormous clout on Wall Street and Washington, and they take no prisoners. Louisiana Republican Richard Baker learned this when he tried to rein in Fran and Fred from his House subcommittee chair in 2000. Fan and Fred responded with a huge lobbying campaign that bathed his committee in campaign contributions, donating during the 2000 election cycle to 21 of 27 other members. Texas Democrat Ken Bentsen alone cashed checks for $17,000. Mr. Baker's probe lost steam after he saw how many political allies the companies had rented.
So far this cycle, according to the Center for Responsive Politics, Fan and Fred have given $37,000 to members of the House Financial Services Committee, more than $34,000 of that to the subcommittee with Fan and Fred oversight, and $102,000 to Members of the Senate Banking Committee. As for "soft money," Fred ranks eighth in donations, ahead of both Microsoft and Global Crossing. It has donated more than $1 million toward the 2002 elections, evenly split between Democrats and Republicans, while Fan has donated nearly $800,000, mostly to Republicans. (And let's not forget lobbying expenses. From 1997 to 1999, Fan spent more than $16 million to hire more than 60 lobbyists.)
We'd be the first to defend Fannie and Fred's right to make these donations. We just think that companies taking on so much risk and debt, and backed by taxpayers, ought to be more transparent in what they tell the world. The time for the political system to focus on Fannie and Fred isn't when we have a housing crisis; by then it'll be too late. The time to make them come clean is now.
Raines has a background in black politics.
Bank CD's are not hard assets.I was talking more about such things as real estate,gold,art,etc.However,these assets are not liquid.
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