Skip to comments.The People Responsible for Fannie Mae and Freddie Mac
Posted on 09/17/2008 12:54:25 PM PDT by Rodm
The People Responsible for Fannie Mae and Freddie Mac By Bill Mann, Seth Jayson, Tim Hanson, Nate Weisshaar and Keith Beverly September 10, 2008 Comment (33) Recommend (91)
It was a wise man who noted that the only corporate structure more insidious than a government-sponsored monopoly is a government-sponsored and investor-owned monopoly. In the end, as Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) have now so painfully proved, trying to serve the master of public policy while generating returns for investors will lead to disaster.
Fannie and Freddie collapsed because they were part and parcel of the widespread gross financial misconduct that has taken place in the United States over the past decade. It's easy to miss this fact, but the reality is that too many people were making too much money pumping up the housing market. In 2005, the Office of Federal Housing Enterprise Oversight (OFHEO), the erstwhile regulator of the two, attempted to limit their use of off-balance sheet entities to groom earnings. In the end, it didn't, because, as one reform-minded politician admitted, Congress was afraid of undermining the housing boom.
Some are more culpable than others As part of the conservatorship, the Department of the Treasury has demanded that Daniel Mudd and Richard Syron, the CEOs of Fannie and Freddie, respectively, step down. Certainly, at the time of a corporate collapse, those in charge have to bear some responsibility. But Mudd and Syron came into their roles when the great pillaging was well in process.
At some point not too long from now, the nation's attention is going to turn from the immediate players to those who benefitted the most, shouted down the skeptics, and/or stood by as Fannie and Freddie deviated from their core business in the name of growth and/or mission. These people are keeping a low profile right now, until the taxpaying public starts paying attention to something else. As taxpayers, we don't particularly enjoy our role in this relationship, and we're hopeful over the longer term that the following folks cease to enjoy theirs.
Franklin Raines Fannie Mae was always a political beast, but it reached its elbow-swinging heights during the time when former Clinton administration budget director Franklin Raines sat in the CEO chair. Under Raines' leadership, Fannie overstated earnings by a stunning $10.6 billion, all the while paying Raines and his senior management team massive bonuses.
It was under Raines' management that Fannie morphed from being a company in a sleepy business -- issuing debt to buy mortgages from lenders -- into a far more risky and exciting one: buying up mortgages and holding them, thus capturing the spread between its borrowing costs (which were lower than anyone's other than the federal government's) and the interest rate received. It was a great business, except that it had nothing to do with Fannie's charter. According to a May 2006 report from OFHEO, Raines became obsessed with keeping earnings per share as high as possible and motivated management to achieve that goal by setting up a bonus system that rewarded increasing earnings per share (EPS).
The thing is: Any company can hit an EPS number if it doesn't worry about little things like accounting rules, debt levels, and risk factors. All told, Raines pulled in some $90 million between 1998 and 2003, the majority from bonuses. And when OFHEO began to ask uncomfortable questions, Raines actively lobbied Congress to cut its funding. In April, Raines agreed to disburse $24 million for his role in the accounting "errors."
Timothy Howard Former Fannie Mae CFO Timothy Howard is another major player who is probably cowering in a corner somewhere. For all of the expletives and derogatory names thrown at former Enron CFO Andrew Fastow, he at least stayed around to take his punishment. Inmate No. 14343-179 pleaded guilty to fraud and is serving a six-year prison term. Howard, on the other hand, saw the writing on the wall -- largely because he was the author -- and got out of Dodge.
As Fannie's CFO from 1990 to 2005, Howard signed off on the financials that overstated the company's earnings by $10.6 billion from 1998 to 2004. His reward? A cool $14 million in salary and $16.8 million in bonuses during the period -- bonuses based on the earnings plan that Raines set up.
While Howard was not the only person at Fannie guilty of constructing fraudulent financial statements quarter after quarter, as CFO he is most responsible for the integrity of said statements. Whether he left early enough to avoid culpability remains to be seen. However, we've heard through the low-security-prison grapevine that Fastow is lonely these days and wouldn't mind talking shop with a fellow former CFO.
Barney Frank The House Financial Services Committee chairman and Democratic congressman from Massachusetts has long been a proponent of both Fannie and Freddie, assuring the public that their mission to encourage home ownership outweighed the distortive risks they brought to the market, and that the federal government was not, in fact, on the hook for their liabilities. In fact, it seems clear now that Frank had no idea of just how poor a grasp Fannie and Freddie had on their lines of business. As recently as Aug. 25 he told Money magazine, "Fannie and Freddie are better off than the market thinks. ... Part of the problem is rumormongering by short-sellers."
What's more, though Frank will blame past political opponents for failing to further regulate the mortgage market by banning products such as subprime loans, the fact of the matter is that the very presence of Fannie and Freddie incentivized brokers to overstate the creditworthiness of borrowers and then pass on that risk to the federal government, all while being cheered for helping more people "realize the American Dream." While we can all agree (I hope) that mortgage markets only function when -- as Frank told Money, banks "do not lend money to people who can't pay it back" -- Frank's ideology in this case blinded him for decades to the realities of the marketplace and the operations at these companies, leading him to stonewall realistic reform efforts that might have helped us avoid the current calamity.
Angelo Mozilo There's good reason for Angelo Mozilo to hide under a desk these days. Few, if any, extracted more personal profit from the credit bubble than the CEO and founder of Countrywide Financial. Mozilo's talking points always borrowed heavily from the propaganda of our government-sponsored enterprises (GSEs). Countrywide liked to pretend that it was performing some kind of public service -- "breaking down barriers" -- by making homes more "affordable" to the average (or subaverage) wage earner. Unfortunately, as speculation drove home prices to ridiculous levels across the U.S., "affordability" came to be the code word for gimmicky, high-interest subprime loans lavished on the riskiest of borrowers in order to get them into a mortgage that would soon be bundled and shipped off to the suckers on Wall Street.
Unfortunately for borrowers and investors in Countrywide's mortgage paper, the American Dream of home ownership quickly morphed into a nightmare. Default rates surged, followed by the inevitable foreclosures, and mortgage paper backed by Countrywide loans became as valuable as post-bubble, dot-com stock options. Countrywide was only spared the ignominy of bankruptcy when its longtime sugar daddy, Bank of America (NYSE: BAC), stepped in to take it out.
As captain of this sinking ship, CEO and founder Mozilo was, for a time, very vocal in defending his company's legacy. But like so many others in America's great housing bubble, talk was one thing, and actions were another. As the housing bubble began peaking in 2003 and 2004, through the period when Countrywide's risky lending fell apart, Mozilo engaged in one of history's greatest stock dumps, selling more than $480 million worth of shares, according to the tally of insider filings on secform4.com. This graph tells the tale.
Alan Greenspan If not the boldest of the group, then at least the most public, Greenspan, the man many are now blaming for the housing bubble (there were a brave few that piped up years ago), has refused to go quietly into his well-padded retirement. The man charged with providing the country with a financial voice of reason fell far short, so much so that it might be comical if it weren't so tragic.
Greenspan's denial of the possibility of a housing bubble has been widely derided in the past year, but a single statement could be excused as human error. However, a quick scan shows that this wasn't a single event. He also promoted the adoption and expansion of adjustable-rate mortgage (ARM) products in early 2004, when short-term rates were at or near historic lows. That same year he claimed, "securitization by Fannie and Freddie allows mortgage originators to separate themselves from almost all aspects of risk associated with mortgage lending." And separate themselves they did, ceasing to perform any kind of due diligence as to the ability of borrowers to pay for the homes they were buying.
Now retired from his role as the nation's monetary conscience, Greenspan continues to espouse his, er, theories on the financial crisis through editorials in which he denies any culpability for the events of the past three years. He is also applying his experience and insight as an advisor for Paulson & Company, a hedge fund which cashed in on billions of dollars by calling the collapse of the subprime mortgage market that Greenspan helped create.
An ignominious list To be sure, there were many more complicit in this mess, including consumers who bought more house than they could afford. And though we have to move forward now, let's hope no one forgets what's happened here.
McCains campaign needs to get out in front on a few things.
Its really sad that they havent already, really, as they have squandered precious time and are allowing perceptions about McCain to sink in and harden. It looks like McCains campaign is reacting politically on 0bamas turf. This is the wrong thing to do. Instead, McCain should be playing experience up again. But not experience in general, but rather his specific legislative experience.
McCain sponsored a bill in 2005 to reform Fanny Mae and Freddie Mac, so why is he playing defense to 0bama on this issue? What was 0bama doing in 2005? I doubt he even knew what Fanny Mae and Freddie Mac were back then. McCain needs to be presenting himself as a knowledgeable and experienced manager who has seen these problems coming for a long time, because he is, and he has. Why his reaction has been what it has been makes no sense at all. Its not reinforcing confidence in him as a leader who can be turned to in troubled times. If McCain frames the situation in easy to understand terms, and makes the case for his own expertise in dealing with these issues something 0bama simply cannot match then McCain wins this argument. But so far, 0bama is clearly winning it, and thats a damn shame. Instead of turning to populism and pandering, McCain should be turning to experience and knowledge.
McCain talks about making pork barrelers famous. Well, right now he should be making Franklin Raines famous. Very famous. And Robert Rubin. Both of these men are responsible for the banking crisis, and both men are 0bama advisers. McCain needs to lead a charge against them.
McCain needs to be placing the blame squarely on Rubin and the Clinton administration for repealing the Glass-Steagall Act, instead of blaming Bush. Simply blaming Bush wont help. In fact it hurts McCain. Because no matter how much McCain distances himself from Bush, he is still going to be more closely tied to Bush than 0bama is. To the extent that Bushs policies are blamed, it harms McCain and only McCain.
The correct way for him to distance himself from Bush is as a manager. He should blame not Bush policies, as that only sticks to himself, but Bushs management style, priorities, and sweeping neglect. If he wants to distance himself from Bush, it should be as a serious manager who is more interested in solving problems than playing politics and scoring points. Its not Bushs overall philosophies that are unpopular. It is the way he implemented them or didnt.
McCain should paint a picture of how he would govern day to day as a manager behind the Resolute Desk in the Oval Office that differs from both Bush and 0bama. Its called Leadership. McCain has a huge Leadership advantage over 0bama, so he ought to be exploiting it right now.
McCain should also be calling for more than a commission to look into the problems on Wall Street. He should be calling for a special prosecutor to investigate these 0bama advisers. Right now, Nancy Pelosi is putting together a team of all of the Democrats in congress who are responsible for the meltdown to place the blame on Bush. McCain should not be part of their chorus. He should be offering an alternate view. He should be placing the blame on the guys Nancy has appointed to cover up their mess.
Also McCain should be highlighting 0bamas recent comments about McCains outrage at Wall Street, where 0bama says that cutting taxes is an odd way to punish them. McCain needs to put these words into perspective. 0bama is saying that investors — those Americans who own stocks — should be PUNISHED, and the way to do that is raise their taxes. That view speaks volumes about 0bama. McCain needs to point that out.
Chairman Barney Frank represents Massachusetts' Fourth Congressional District. The other Democratic members of the Committee are: Rep. Paul E. Kanjorski, PA Rep. Maxine Waters, CA Rep. Carolyn B. Maloney, NY Rep. Luis V. Gutierrez, IL Rep. Nydia M. Velázquez, NY Rep. Melvin L. Watt, NC Rep. Gary L. Ackerman, NY Rep. Brad Sherman, CA Rep. Gregory W. Meeks, NY Rep. Dennis Moore, KS Rep. Michael E. Capuano, MA Rep. Rubén Hinojosa, TX Rep. William Lacy Clay, MO Rep. Carolyn McCarthy, NY Rep. Joe Baca, CA Rep. Stephen F. Lynch, MA Rep. Brad Miller, NC Rep. David Scott, GA Rep. Al Green, TX Rep. Emanuel Cleaver, MO Rep. Melissa L. Bean, IL Rep. Gwen Moore, WI Rep. Lincoln Davis, TN Rep. Paul W. Hodes, NH Rep. Keith Ellison, MN Rep. Ron Klein, FL Rep. Tim Mahoney, FL Rep. Charles Wilson, OH Rep. Ed Perlmutter, CO Rep. Christopher S. Murphy, CT Rep. Joe Donnelly, IN Rep. Bill Foster, IL Rep. Andre Carson, IN Rep. Jackie Speier, CA Rep. Don Cazayoux, LA Rep. Travis Childers, MS
Right Mac has gone into Bush mode. I will never again carry water for those that don’t fight back...
B-U-M-P everyone’s accusing me
Keith X on the list...interesting.
There was nothing wrong with repealing Glass-Steigel. The problem was that Grahm-Leach made regulator approval of financial institution service innovation contingent upon satisfactory ratings for compliance with the Community Reinvestment Act. Financial institutions could diversify, only if they proved they served low income and minority neighborhoods, to the satisfaction of the ilk of ACORN and the like. Financial institutions proved they served minority communities by increased selling of subprime products.
Very nicely laid out.
Have you forwarded your thoughts to his campaign?
If not, please do so!
Ho-Bama Hey-Bama Bama Bama Ho
Bama Hey Bama Ho Bama
Hey Bar-ry, Bar-ry you're a fool by me
Bama Ho Bama Hey Superstar!
Tell the Americans to be quiet
We anticipate a riot
This common crowd
Is much too loud
Tell the mob who sing your song
That they are fools and they are wrong
They are a curse
They should disperse
Ho-Bama Hey-Bama Bama Bama Ho
Bama Hey Bama Ho Bama
Hey Bar-ry, Bar-ry you're a crook by me
Bama Ho Bama Hey Superstar!
Why waste your breath moaning at the crowd?
Nothing can be done to stop the shouting
If ev'ry tongue was still the noise would still continue
The rocks and stones themselves would start to sing:
Crowd, with Obama:
Ho-Bama Hey-Bama Bama Bama Ho
Bama Hey Bama Ho Bama
Hey Bar-ry, Bar-ry you're a commie lib by me
Bama Ho Bama Hey Superstar!
mark for later
Amen! Gorelicks fingerprints have been on everything dirty, from the Klinkton administration (building the wall between law enforcement agencies that allowed 9/11 to occur due to inability to share information) to the 9/11 commission itself (how to heck did this woman get on that committee?!) to now this financial mess (she was on one of the boards of one of the failed financial institutions). This woman embodies corruption. No wonder her last name is GORE-LICK...!
Some of us are trying to collect links to all the “FannieGate” posts at:
A lot of people have suggested I forward this to them.
I don’t have any contact outside of the web form on the johnmccain.com contact page.
Hopefully everyone who agrees will help forward it as well, even if it means just emailing it to firstname.lastname@example.org / submitting on the website contact form.
Who knows if if will ever be read by the right people.
Exactly. They unilaterally braided the rope that was used to hang them.
Rope fronds having been supplied by the execution of liberal ideology through legislation slipped into Grahm-Leach.
Bullcrackey. Bush inherited this mess. He also tried to reform Fanny/Freddie -- but, as with McCain's proposal -- there was no political will in Congress to do anything about it. Bush never appointed anyone to the Fanny/Freddie boards -- which is why there are some many Clinton appointees involved in the mess. McCain's avoiding it because so many of his colleagues in the Senate and the beltway were feeding from the trough. He'd much rather come down with more regulations on Wall Street -- just what we need, right? American business just thrives on yet more regulation by bureaucrats who can't regulate themselves.
If there's anything to be learned from McCain's inability to capitalize on the Fannie/Freddie mess, it's that we'd be in a far better position on this issue if the candidate weren't a "bipartisan" Senate warhorse unwilling to attack his pals in the 100 Club.
Washington Compost article circa 2005
So you’re telling me that if Ronald Reagan was president right now, he wouldn’t have been able to get it done?
Let’s face it, the one who has really lacked political will has been President Bush.
He got bogged down in Iraq politically, and spent every cent of his capital on winning there.
There has not been much time, energy, attention, or concern from the Bush administration for much else.
With the exception of Iraq, George has generally run from a fight.
And that’s the bottom line.
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