With Image Make-Over, ‘Little Has Changed’ At FNM
The New York Times has this report on Fannie Mae. “A large poster outside the Washington office of Fannie Mae’s new chief executive lists the promises all senior managers were recently instructed to make to reshape the company’s culture. The principles stand in stark contrast to how Fannie Mae long operated.”
“Under Franklin D. Raines and his predecessors, the company was criticized by investors and lawmakers for making arrogance an art form. It relied on an army of professional lobbyists and powerful strategic alliances in the housing and finance industries to silence critics. And when federal investigators found almost $11 billion worth of accounting errors in 2004, Fannie denied it had any problems, choosing to attack its regulator instead.”
“On top of the Rudman report, a flurry of federal regulators are continuing to look under Fannie’s hood. They are examining how executives violated accounting rules to smooth its earnings, leading Fannie Mae’s board to force out Mr. Raines and most of his senior management team beginning in December 2004.”
“On Wall Street, where the company’s share price and dividend have been almost halved, investors are hearing from Fannie more often but can glean few details. More ominously, legislation that threatens the very core of its business looms in Congress. Among the options the Senate is considering are creating a new, stronger regulator and imposing sharp limits on the size of its highly profitable portfolio.”
“For all the discussion of a humbler, gentler Fannie Mae, critics say little has changed. ‘All the talk of the new Fannie Mae means nothing unless you put the proper oversight structure in place,’ said Mike House, executive director of FM Policy Focus, a lobbyist group backed by the company’s mortgage industry rivals. Besides, he added, ‘the only reason that Fannie changed their way of doing business is because they were caught.’”
“Critics say that Fannie Mae’s status as a quasi-public enterprise has simply subsidized rich investors instead of homebuyers and led to a heavy-handed approach in dealing with critics and regulators.”
“This week, Ben S. Bernanke..called for requirements that would cause Fannie to shrink its mortgage portfolio, saying the holdings were ‘much larger than can be justified’ by its affordable housing mission, and represented a financial stability risk.”
“Tactically, Fannie seems to have simply lowered the volume of its approach instead of scaling it back. In public filings yesterday, the company reported its overall lobbying budget actually rose about 15 percent, to $10.1 million, which it attributed to an increase in administrative costs and internal lobbying efforts. And when the House bill was being considered last fall, Fannie still pressed hard.”
“‘They had their own people,’ Mr. House of FM Policy Focus said. ‘Plus, they had the homebuilders and Realtors lobby for them.’ ‘It was very frustrating to deal with Fannie Mae in the past, you weren’t asked for your opinions but were told what to do,’ said Jerry Howard, the head of the homebuilders’ industry group. ‘They are now a partner where you can conduct conversation and dialogue.’”
“Shortly after its chief regulator required Fannie to increase substantially its capital reserves because of the accounting troubles, the company began selling off parts of its portfolio. It shrank by about 20 percent by the end of 2005. Whereas Fannie once packaged about 40 percent of all new mortgage loans, its share fell to less than 20 percent in 2005.”
“‘The markets are getting more competitive and the protection afforded by their implicit subsidy is getting eroded,’ said Dwight M. Jaffee, a professor of real estate finance at the University of California, Berkeley. And hedging against home price inflation and interest rate risk could eat into profits even more.”
Thanks to the reader who sent this in. Where are the prosecutors the Justice Dept. put on the case in fall 2004? What about the thousands of offshore entities FNM set up? Why isn’t congress doing something about this?
Where are the prosecutors the Justice Dept. put on the case in fall 2004?
Too big to fail = Enforcing the law at this point would cause more damage.
accounting troubles = buying lots and lots of really bad loans
millions for gov clerks- everyone in the industry is laying off except fnm,fre
and the post office = all the same
The Sh*t will hit the fan and there will begovt investigations. This will create a financial crisis pushing the country into a recession. The CEO and all the big shots and board directors will lose their jobs, BUT not after their golden parachute, and the CEO will take his $50 million dollar severance package and head to Tahiti and sip margaritas and soak it up on the beach while FNM falls apart.
While Fannie sells on the loans to others to make profits, they still keep all the risk. The people buying the loans don’t have the risk unless Fannie runs out of money, then you are talking BK or government bailout. The sh*t hasn’t even hit the fan yet.
Raines and the rest of the yahoos who ran Fannie should loose their pensions and be put in jail!!! Does anyone hear me? They could play three handed pitch with Ebbers and Lay, how ’bout it?
“Some executives who get into trouble do well. At Freddie Mac, ousted chief executive Leland C. Brendsel successfully sued last year to force the release to him of $50 million in severance benefits that the company’s regulator had frozen. Former Fannie Mae chairman and chief executive Franklin D. Raines, forced into retirement after an accounting scandal, last year left with a pension that will pay him $1.4 million a year for life.”
http://tinyurl.com/ctkmc
These guys are nothing less than thieves!
I’d take their $1.4 million pension in a heartbeat and let them have a felony record. Now they can go out there and try and make it like everyone else.
Look, I’ll completely screw up their accounting for just $500K a year for the rest of my life. Think of the savings!
Who’s got the CFO’s number?
Rates must rise if world growth fuels inflation
Rates must rise if world growth fuels inflation
Rates must rise if world growth fuels inflation
IRWIN STELZER
American Account
LAST WEEK’s Valentine’s Day may be the last on which lovers of low interest rates will find their love requited. It is increasingly likely that short-term interest rates will be above 5% when sweethearts next exchange vows of undying devotion.
Ben Bernanke, only two weeks in the Federal Reserve Board chair, told Congress that he intends to continue Alan Greenspan’s policy of raising short-term interest rates. Many on Wall Street believe the increase that will almost certainly come late next month — the 15th one-quarter point rise — would merely be the new chairman’s demonstration that his anti-inflation bona fides are in order, rather than a reflection of any real concern that inflation is a threat.
They are wrong. Although making clear that he would watch “incoming data” before deciding — when did a Fed chairman ever ignore incoming data? — Bernanke noted that demand is rising so rapidly that “output could overshoot its sustainable path, leading ultimately — in the absence of countervailing monetary-policy action — to further upward pressure on inflation”. He then went on to endorse earlier projections of the Federal Reserve’s monetary policy committee: growth of 3.5% this year and 3%-3.5% in 2007, inflation as measured by the Fed’s preferred indicator at “about 2%” this year and 1.75%-2% next year.
The first thing to notice is that the growth projection is close to the top of what the Fed has always thought the economy could manage without triggering inflation. The second thing to notice is that the projected inflation rate is at the top of Bernanke’s 1%-2% comfort range. Taken together, they create a presumption in favour of further rate increases.
As does last week’s bullish Report of the President’s Council of Economic Advisers. Bernanke was chairman of that council until the president nominated him to succeed Greenspan, at which point he resigned. Although he excused himself from presenting the report, he probably participated in shaping it in its early stages. That report “calls for the economic expansion to continue in 2006 … (and) in subsequent years”. This is not a prescription for a relaxed attitude towards the threat of inflation.
Nor are the recent data the Fed says it is watching closely. Retail sales rose 2.3% in January. The January report on factory output was also “very strong”, producing a “tightening of capacity (that) parallels the tightening in the labour market”, according to economists at Goldman Sachs. Housing starts surged to levels not seen for more than 30 years.
The January spurt in sales and output surely got Bernanke’s attention. As did the report that net inflows of capital in December fell to $56.6 billion, from $91.6 billion in November, and for the first time in seven months failed to cover America’s burgeoning trade deficit. This means that more dollars left the country to pay for cars and T-shirts than were returned by investors buying American assets. If that becomes a trend, the Fed might have to raise rates to induce greater foreign investment, and thereby prevent the greenback from depreciating so fast and so far as to exacerbate inflationary pressures.
Add to this new worries that the safety valve the Fed has been relying on to relieve inflationary pressures might be about to become a thing of the past. Greenspan persuaded his monetary-policy colleagues that globalisation has made worldwide capacity, rather than only domestic capacity, available to American consumers and producers. No matter if American labour markets tighten; there are all those low-wage Chinese and Indians eager to turn out the goods Americans want and, in the process, prevent American workers from driving their wages to inflation-producing levels. No matter if American factories are at capacity; Asian and Latin American factories will prevent American companies from raising prices.
The availability of that worldwide capacity, along with rising productivity, has indeed kept compensation and prices restrained. And the large pool of Chinese labour will continue to restrain the wages of many American workers.
But rapid growth of domestic demand in China, the recovery in Japan, growing demand from oil-rich Russia and Middle Eastern countries, along with a continued willingness of American consumers to shop until they drop, might just be sopping up a good deal of the worldwide capacity that has restrained inflation in America. Janet Henry, global economist at HSBC Global Research, has found that when growth in output in the rest of the world exceeds past trends by one percentage point, which it may be doing in most large economies other than the moribund eurozone, the American inflation rate rises by nearly 0.5%.
Bernanke might, just might, have taken charge when the Greenspan safety valve has been made inoperative by overseas growth. That would put even more pressure on the chairman to raise interest rates, not only to 4.75% at the March meeting, but to above 5% at subsequent meetings. Debt-ridden consumers, and the millions of homeowners who have variable-interest-rate mortgages, would be unhappy, but not the Democrats, who sense an opportunity to reclaim Congress in the November elections because of voter unhappiness with the conduct of the war in Iraq.
A final straw in the wind: Bernanke doesn’t believe that because long-term interest rates are below short-term rates, a slowdown in economic activity, and hence an easing of inflationary pressures, is imminent. He dismissed such forecasts with an unGreenspanian verbal shrug: “The yield curve is not now signalling a slowdown.”
Greenspan once predicted that anyone betting that interest rates would remain low is doomed to lose some money. Bernanke may be the man who imposes that loss on those who failed to take Greenspan’s advice. Unless … but that’s for another column.
Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute
from fannie mae faqs
Frequently Asked Questions
U.S. Government Does Not Back Fannie Mae Debt
Doesn’t Fannie Mae’s implicit government backing allow it to borrow funds more cheaply than banks, resulting in a built-in competitive advantage?
——————————————————————————–
The prospectuses for all of Fannie Mae’s debt offerings clearly state that the U.S. government does not back the company’s debt instruments. In fact, commercial banks, including the three that make up half of the FM Policy Focus board of directors, have many close ties to the government.
Commercial bank deposits are backed by the full faith and credit of the federal government. This direct guarantee of the government covered $2.9 trillion in insured deposits at the end of 1999. Fannie Mae securities are explicitly NOT guaranteed by the government;
Commerical banks can borrow from their own cooperative government-sponsored entity, the Federal Home Loan Bank System. At the end of 1999, banks and thrifts had $336 billion in such loans;
They make FHA and VA loans, which are fully guaranteed by the federal government;
They can obtain emergency loans from the Federal Reserve’s discount window; and
As members of the Federal Reserve, commercial banks are the part of the nation’s payment system that touches the public. This means that their customers keep hundreds of billions of dollars in accounts that pay little or no interest and thus are a cheap source of funds for banks. The total in non-interest bearing deposits at banks and thrifts amounted to $716 billion at the end of 1999.
The result of these ties to the government, and the fact that banks fund a lot of their loans with short-term deposits, is that banks have a lower cost of funds than Fannie Mae: 3.80 percent for banks in 1999, versus 6.18 percent for Fannie Mae.
Return to FAQ
Fannie Mae securities are explicitly NOT guaranteed by the government;
So FNM securities are explicitly NOT guaranteed by the government to be backed by US dollars which are explicitly guaranteed by the government to be backed by…
….nothing.
It’s all so clear to me now.
I have a very simple question, which may not be simple to answer: If Fannie Mae were forced to report its financial results today, would the financial reports look like the inverse image of a bankrupt company?
One further question: How come FNM stock is so resilient despite the inherent risk in investing in a company with no financial reports on which to base one’s valuation?
I can answer the second question easily enough:
If everyone else is buying FNM, then I can’t be blamed for doing so.
I have wndered about that. How can institutions park billions of dollars in an entity that is unable to provide audited financial statements? Aren’t they flying blind?
The risk to the managers of such institutions is high. Those who invest other people’s money are subject to fiduciary obligations. If they are found to have violated those obligations, it is my understanding they can be held personally liable for any losses that are incurred by their fund as a result. Any one know anything about this?
And the NYSE requires the companies which have stocks traded there to issue regular audited statements. But it has been over a year now since FNM last issued an audited statement and it is still listed on the NYSE.
The law applies to us little guys but apparently not the big guys!
I think feepness’s comment applies to fiduciaries: If all the other pension fund managers are buying FNM (or MBS, or any other asset-equivalent of a ticking time bomb), then I bear no risk in also doing so. Following hte herd is generally a good CYA strategy.
I suspect that this matter will not come up until heavy losses are realized in FNM securities. That is when pension beneficiaries and mutual fund shareholders bring suit. And the fact that others did it isn’t a defence in a law suit. Either an investment manager complied with the law or didn’t, it seems to me.
Does anyone know anything about the “prudent man” rule? My memory is that money managers avoided investing in stocks because of the greater risk than bonds. I think there was a court decision many years ago that permitted stock investments as “prudent.” For many years afterwards, pension funds were inclined to invest at least 60% in bonds, the balance in stocks or cash. Then a law was passed that permitted riskier investments. Now the funds with the greatest return on assets invest in venture capital, real estate, commodities, etc. And as of a few years back, bonds were usually less than half( often much less than half) of the typical institutional portfolio. it was fairly typical for capital pools to be 60 to 70% equity during the stock boom. I am not current so I don’t know what is typical today.
As a result, there is a risk that an economic downturn of significance may reveal substantial losses in pension funds, mutual funds, etc. The old anchor of bonds is no longer there for many of them.
“A large poster outside the Washington office of Fannie Mae’s new chief executive lists the promises all senior managers were recently instructed to make to reshape the company’s culture.”
Too bad his name is Mudd.
Could history repeat itself in Valley’s ‘06 housing market
Looks like the press has finally cought on.
http://www.dailynews.com/business/ci_3523571
Enjoy
S. &. L. meet F. N. M.
Spoke to a second cousin… found out they are moving to a downtown San Diego condo from Chula Vista.
Renting the condo that is… and the house in CV has been on “for a week to beat the spring rush.”
I told her that I suggested she be the cheapest place on the block by 5% because we are at a strange place in the market and I didn’t want to see her chase the wave down. She’s retired and owned in San Diego since the 80s and doesn’t need every penny of the gains.
She agreed and told me “4 or 5 people have said the same thing.”
Look out below.
Lucky for your cuz she can afford to underprice. Best of luck to more recent buyers who have lots of expensive toys spilling out of the garage and into the driveway.
One of the more interesting mysteries with FNM is its derivatives portfolio. FNM has “hedged” its risks with dervivatives for years. But derivatives are not easy to understand or to value. I suspect one of the issues holding up audited statements is sorting out the accounting on the derivatives. A few years back, a wave of PhD matheticians swept into Wall Street and structured highly creative derivatives. They were so creative that they can only be valued by getting an expert’s opinion as to their worth. Of course, different experts have different opinions just as appraisers can have different opinions of value of real estate.
Derivatives are potentially explosive. Long Term Credit Management, with the finest brains on Wall Street blew up threatening the global financial system. It required a joint rescue mission by the leading Wall Street firms. A few years ago, Orange County, CA went bankrupt because of derivatives. And one of the oldest banks in the UK was destroyed by derivatives. Remember Nick Leeson?
So it seems to me that any institution that holds billions of dollars of FNM securities and is unable to examine audited financial statements is asking for big trouble.
“It required a joint rescue mission by the leading Wall Street firms.”
Dawnal —
Do you have any recollection of who spearheaded that rescue mission? (Hint: His initials are AG.
We discussed this before but it bears mentioning again… I went through my 401K and checked all the nice conservatively rated funds.
Chock full of MBS MBS MBS. Every single one (except the govt one).
Make sure you are really getting what you bargained for in those bond funds.
Oh yes. Sir Alan’s hand was evident but I think the point man was the head of NY Fed. The Fed pressured all the firms to participate but from that point on it was mostly the action by the firms as opposed to the Fed that took care of the problem. I remember attending a talk by a Fed governor who was a former banker in my area. The news about LTCM had just broken and I didn’t even know much about it yet. But the dramatic change in demeanor of this banker certainly caught my attention. His usual easy going style was gone. He kinda looked like he had seen a ghost. From that I concluded that there was a very serious issue with LTCM and it later became apparent that their problems genuinely threatened the financial system. Since it was quietly worked out most people didn’t see the exceptional threat it posed.
Economists Worry About the Rent, Too
Economists Worry About the Rent, Too
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By CONRAD DE AENLLE
Published: February 19, 2006
The Greenspan Federal Reserve did the heavy lifting, never missing a chance in its last 14 interest-rate-setting meetings to execute a quarter-point upward nudge. With the new-model Fed under Ben S. Bernanke widely viewed as planning another tweak or two, one market strategist said he would be fine-tuning the way he views an important piece of economic data this week.
Ed Yardeni, chief investment strategist at Oak Associates, says he expects a core consumer inflation rate of 0.2 percent for January. That would be the same figure as in the preceding three months and the number forecast in a Bloomberg News poll of economists. The government report is to be released Wednesday.
The core Consumer Price Index excludes the volatile components of food and energy. When those are tossed back into the mix, the Bloomberg poll sees a gain of 0.5 percent.
The C.P.I. component that Mr. Yardeni will examine especially closely covers rent and comprises about one-fourth of the basket of goods and services tracked in the report. Rent is important, he said, because of its close association with wages.
“I’m going to be most interested in the C.P.I. for the next several months,” he said. “The core inflation rate has been very well behaved for the last couple of years, despite soaring energy prices.”
If there is to be a display of bad manners in the index, it could be heralded by an increase in the rent portion. Wages have been climbing, Mr. Yardeni pointed out, and when that has occurred in the past, higher rents have often followed.
“Historically there has been a good correlation between wage inflation and rents,” he said. “If people are paid more, landlords figure it out and charge more for rent.”
With the Fed paying close attention to economic data as it decides how many more rate increases may be needed, any increase in the C.P.I.’s rent component would be particularly unwelcome now, Mr. Yardeni said.
“If that historical correlation works again, the core inflation rate is going to be back on the Fed’s radar screen as a reason to be tightening,” he warned. “Any time core inflation picks up it will keep Bernanke and the Fed on a tightening path.”
DATA WATCH The Bloomberg poll estimates that the index of leading indicators, due on Tuesday, will show a climb of 0.6 percent for January after a gain of 0.1 percent in December.
The report on Friday on January orders for durable goods is expected to show a 2 percent decline, according to the poll. Mr. Yardeni said the dip would be merely a respite in spending after three consecutive months of gains.
OC Register article on rising rents:
http://www.ocregister.com/ocregister/money/abox/article_1006123.php
At first this looks bad for housing bears and many RE permabulls will interpret it as such.
However, rents are part of CPI and house prices are not. Get ready for higher interest rates and less valuable housing.
They can ask for whatever they want. Doesn’t mean they’ll get it. And even if they do get it from some people, their overall revenue may drop due to vacancies and increased advertising costs.
The landlords can push, the renters will push back.
Someone asked why Fannie’s stock was so resilient. (I am a Value Investor), as I look around, a *lot* of Value Managers hold Fannie and Freddie in their portfolios - Oakmark (Bill Nygren), David Dreman and many others. I have a lot of respect for these managers. But I just can’t understand why they are bullish on Fannie and Freddie. To me, it looks like a classic Value Trap.
Even the sage of Omaha has been been quite the hypocritical when it comes to Fannie. On the one hand, he has been *very* critical of Derivatives. On the other hand, he has pumped Fannie on many occasions. He has publicly praised Franklin Raines too.
It will be impossible for the Fed to orchestrate a bailout of Fannie and Freddie (ala LTCM). So, nothing prevents from these from bankruptcy.