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.
McCain's avoiding it because so many of his colleagues in the Senate and the beltway were feeding from the trough.Well this is where the rubber meets the road on McCain's 'Washington reform' agenda. If he's serious about his rhetoric, then it is time for him to call his colleagues out, on both sides of the aisle.
We need posts like this like a hole in the head...
Please refrain from internal fighting and settling old scores and stick to the friggin topic
We are where we are and if you insist on this tack them just vote Democratic, you will have a steady supply of cheese for your Whine!
Umm, maybe not on it's own, but this was a two-pronged attack. Without removing those restrictions imposed on commercial banking, Graham-Leach would not have led to such wide-spread proliferation of the toxic mortagages and their derivatives.
The point is where McCain can and can't separate himself from Bush.
He can on management style and general competence.
Harsh perhaps, but it rings true for most voters.
McCain cannot separate himself by attacking Bush policies, though. He only punches himself in the nose when he does.
McCain needs to say of the Bush administration that it wasn't the principles that failed, it was the leadership.
Because right now, 0bama is saying this is all the ‘final verdict’ on conservatism itself, that conservatism is a discredited ideology.
So McCain needs to say that Bush wasn't able to get done what he needed to. McCain needs to emerge as more of a leader than both 0bama and Bush.
That is how McCain can run against Bush and win.
Gorelick, Raines, Clinton all in the same club. (CFR) These folks have a plan to bankrupt America.
http://www.modernhistoryproject.org/mhp/ArticleDisplay.php?Article=FinalWarn05-3
Talking to our accountant at work who is a staunch conservative today. He placed the blame foe Fanny and Freddy failing almost solely on the Government. They forced them to loan to people who shouldn’t have received loans, and the rest of the industry followed to try to get a piece. When they failed, it was because of forced government rules and regulations.
“Since the Council on Foreign Relations has been able to infiltrate our government, it is no wonder that our country has been traveling on the course that it has. The moral, educational and financial decline of this nation has been no accident. It has been due to a carefully contrived plot on behalf of these conspirators, who will be satisfied with nothing less than a one-world government. And it is coming to that. As each year goes by, the momentum is picking up, and it is becoming increasingly clear, what road our government is taking. The proponents of one-world government are becoming less secretive, as evidenced by George Bush's talk of a “New World Order.” The reason for that is that they feel it is too late for their plans to be stopped. They have become so entrenched in our government, our financial structure, and our commerce, that they probably do control this country, if not the world. In light of this, it seems that it will be only a matter of time before their plans are fully implemented.”
Raines (did I mention he is an Obama financial advisor?) should be in jail along with Ken Lay. Where is the public and media outrage over his activities.
In removing Glass-Steigel prohibitions, however, "somebody" slipped a requirement into Graham-Leach that the financial institution must receive suficiently high marks from regulators, before they may innovate their structure. These marks evaluate compliance with the Community Reinvestment Act (CRA), which requires serving lower and middle income minority communities. These marks in part are based upon input from "community groups" like ACORN. To satisfy these requirements, financial institutions seeking to innovate their structure started selling low money down and no income verification (subprime) loans, to get high marks.
So to quote Rev. Wright, "The chickens have come home to roost."
Bump
Counterpoint ..
Very good points, but I also think that McCain is doing a little “rope-a-dope” and after winning and putting Obama-bin-Biden on the ropes for the last two weeks, he’s letting O-B-B get a few jabs in. He might even — has actually — let O-B-B move up a couple of points.
We still have a fairly long time to go between now and the election, and remember the first of the debates are next week. I think McCain will land some major blows to the Elitist next week, as we know Barry’s Party, and his immediate advisers (Franklin Raines for one) have their bloody hands in the financial mess we’re seeing right now.
Calm down people.
There could be a consideration of timing going on here.
after all, getting the big bounce on election day is the goal.
Good info, thanks!
Yeah, right he could have changed the world -- thrown all the scumbags out of DC -- gotten rid of all the lifetime bureaucrats that are protected by civil service/unions -- he had the backing of the Congress, right? You know the guys who were feeding at the trough and didn't want anything to change? Yeah, they all supported him. Clinton fired virtually every US Attorney and no one batted an eyelash. Bush fired a few and it was a national media scandal rising to the level of impeachment.
And by the way, he was two years ahead of McCain in trying to clean up Fannie/Freddie -- where was McCain then? Bush tried to eliminate the presidential appointees on the board -- the ones who walked away with millions after creative accounting episodes -- but no love there, no action, no political will.
You can hang a lot of things on Bush -- Fannie/Freddie isn't one of them.
I didn’t try to hang Fannie and Freddie on Bush. But the Democrats are going to try to. And it looks like McCain’s current strategy is to help them.
It’s the wrong strategy for McCain, because that is playing defense, its not moving forward. He needs to instead go on offense against 0bama, the people 0bama surrounds himself with, the Clinton administration, and the do-nothing Congress of the past 2 years.
Yep. The McCain campaign did pretty much everything I was saying they ought to be doing... just 3 days too late.
Now McCain needs to hammer 0bama for not having any answers. Based on reports, it sounds like 0bama’s campaign is accusing McCain of stealing 0bama’s as of yet still unrevealed proposals. So that tells me that they’re now working on taking McCain’s proposals and tweaking them, and then will unveil them later as their own.
McCain needs to stay on top of them and not let them get away with it. He should call them on having no solutions and then repackaging his as their own.
And McCain should stick to making Franklin Raines and Jim Johnson ‘famous’.
He needs to turn these guys into the equivalent of Ken Lay in the public’s mind, and hang them around 0bama’s neck as tightly as he can.
For whatever reason, Democrats have an advantage over Republicans on economic issues, particularly with a Republican president.
The only way for McCain to overcome this is to completely destroy 0bama’s credibility on a personal level. This is the way to do it. So McCain should keep it up.
0bama stands to lose a lot more than McCain in an exchange on this topic, so there is really no downside for McCain for him to continue down this road as far as it will go.
I suspect we’re going to see 0bama topping off on his gains in the polls now, and a shift back towards McCain again, just like I saw the current reversal coming. I think we’ve seen the near peak of it. How far McCain pushes the recovery really depends on what he does next, not just in attacking 0bama’s economic credibility, but also in showing Leadership. McCain missed an opportunity to stand out in this way earlier this week, which is why he took a hit in the polls.
McCain’s first priority should be in framing exactly what is going on, demonstrating an understanding of it. He should be explaining how it is a finiancial crisis on Wall Street, not an economic crisis on Main Street, and that he is determined to make sure it doesn’t turn into one.
McCain should explain how we got here through congressional action and inaction, through the sub-prime policies of Fannie and Freddie pushed by Democrats in congress.
He should not directly blame Bush policies, because that only hurts himself, and instead should limit his criticism to one of personal management style, citing Bush’s inaction to get reforms done in time. McCain needs to really put himself out there as a lone town-crier whom no one listened to when it counted.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.