‘Deliberate And Intentional Manipulation’: OFHEO
The Fannie Mae review is out. “Employees at mortgage giant Fannie Mae manipulated accounting so that executives could collect millions in bonuses as senior management deceived investors and stonewalled regulators at a company whose prestigious image was phony, a federal agency charged Tuesday.”
“‘The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,’ James Lockhart, the acting director of OFHEO, said. ‘Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing.’”
“The report also faulted Fannie Mae’s board of directors for failing to exercise its oversight responsibilities and failing to discover ‘a wide variety of unsafe and unsound practices’ at the largest buyer and guarantor of home mortgages in the country.”
“Regulators had earlier said that Fannie Mae in 1998 improperly put off accounting for $200 million in expenses to future periods so executives could collect $27 million in bonuses.”
“‘By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders,’ the report says. The manipulation ‘made a significant contribution’ to the compensation of former chairman and CEO Franklin Raines, which totaled more than $90 million from 1998 to 2003, it says, including about $52 million directly tied to the company hitting earnings targets.’”
“Fannie Mae’s ‘arrogant and unethical’ corporate culture led to an $11 billion accounting scandal at the mortgage giant, federal regulators said Tuesday in announcing a $400 million settlement with the company.”
“It said Fannie (Research) used its enormous political power in Washington to lobby Congress in an effort to interfere with OFHEO’s examination of the company’s accounting problems. According to the report, Fannie overstated income and capital by about $10.6 billion, in line with the estimates of the company’s potential restatement.”
“‘A combination of factors led Fannie Mae senior management, through their actions and inactions, to commit or tolerate a wide variety of unsafe and unsound practices and conditions,’ the report said.”
“OFHEO said Fannie’s corporate culture encouraged a false perception that the company took so little risk and was so well managed that it could hit announced earnings per share precisely almost every quarter. That view, OFHEO said, led to the belief that senior executives deserved to be handsomely compensated for the company’s ‘extraordinary performance.’”
“The regulator found that $52 million of former Chief Executive Raines’ $90 million in compensation was linked to earnings. ‘The OFHEO report shows that Fannie Mae’s faults were not limited to violating accounting and corporate governance standards, but included excessive risk taking and poor risk management as well,’ said Treasury Undersecretary Randal Quarles.”
‘By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders,’ the report says.’
The Justice Dept. opened a criminal investigation of FNM in the fall of 2004. Not a word has been heard about it since. Where are the prosecutors?
Election year Ben…..
The important thing here is they settled on a fine rather than having any additional restrictions imposed. There is still no limit in their overall size nor any limit to the risk they can bundle into the securities they market. Their stock went up today.
The FNM offenders are members of the political elite. As such, they are immune from prosecution for all practical purposes. They may receive a slap on the wrist and have to return a small portion of their bonuses, but, mark my words, they won’t go to jail. Although they should.
Franklin Raines learned well in the Clinton Administration.
Shame on the Clinton admin. for failing to prosecute this guy. But it took until 2004 to open a prosecution? Shame on the Shrub administration too.
Raines has the right amount of melanin, so he will get away scot free.
Yeah, play the race card.
I’ll take that bet Libertus!
Who was Sr. V.P. of Risk Management. Tom Lawler where are you? Like those bonuses?
Just another nest of corrupt republican criminals exposed for the liars, cheats and thieves that they are.
The Lingus once again lets us know he can jump the shark at will….
Lingus, I am with you most of the time, but the corrupt officials at Fannie Mae were Clintonites.
The attempt to excuse Bush by blaming Clinton doesn’t work anymore.
Earth pagingLingus.. earth paging Lingus….
Doesn’t your record player have another song?
I am reminded of an old saying that is sums you up nicely, ” never argue with a pig. it will just get you mad and confuse the pig.”
Enjoy the color of the sky in your world, halcion boy.
How to make Lingus’ head explode: mention marc rich, waco, the definition of ‘is’, etc. etc.
Lingus, you have got to be pulling my leg here. Granted, the Congress can’t be bothered to investigate anything, probably some sort of deal worked out with a President who can’t be bothered to veto anything, and it all smells to high heaven.
But there is no way to pin Franklin Raines on Bush. I am a certifed Massachusetts Liberal Trial Lawyer with membership in the Official “I hate Bush, Yale, and Fake Texans” club, but that is going too far even for me.
You’re right Tulk…. but it’s mighty fine bait for republikklowns though. I throw it out there and the cowards jump right in the boat. [lmao]
please give it a rest
Too much bad acid you cunning Linguist. It causes Paranoia you know. I suppose a Republican gave it to your parents at Woodstock, and voila look what it produced.
Fannie Mae has been a proving ground for Democratic movers and shakers since the Roosevelt era.
The class action mailings will probably start going out tomorrow!
Franklin Raines recently made a statement that he did not know about about the accounting irregularities. I did not know about the death camps either!
More republikkkan handwringing from one failure to the next. But it’s all over now.
Lingus, how many layers of tinfoil do you line your hat with to prevent republikkkans from reading your thoughts?
Their actions are no longer defensible so you all abandon them. Thank you.
I am a Democrat you silly twit.
Paranoid Schizo you silly little man. Keep that Acid head rolling.
BWAHAHAHA… I love the line about the layers iof tinfoil…
I can see him now with it on,, ” you cannot read my thought.. arrrghhh”
I treat people like you. Get another therapist or go to Mass. General. Check yourself in and get help.
Check yourself in!
The present administration has its shortcomings, but I still wouldn’t vote for Gore or Kerry.
Ken Lay has the same defense; we should know in a few days how that works out.
“Gee…. it’s not the republikkkans fault” as the rats leap from the sinking ship.
Check yourself in.
Get out of my boat little fishy. Make room for the others.
Check in!
You’re repeating yourself again.
Geesh, get off his ass. Respect his opinion and move on.
Lingus, I mentions politics when I first joined this blog and you can get hammered by it. I’m with you bro but it’s like being in the middle of a room full of realtors when you mention politics.
Republicans - KEEP UP THE GREAT WORK!!!
Mel, I enjoy trolling for republikkkans….. and they don’t have the mental fortitude to leave it alone. But then again, intellectual horsepower and willpower aren’t republikkkan characteristics.
I was so PO’d, I had errors
Lingus, I mentioned politics when I first joined this blog and you can get hammered by it. I’m with you bro but it’s like being in the middle of a room full of realtors when you mention the real estate bust.
I think I need a drink.
One Day At A time!
Comment by Melody
2006-05-23 15:33:10
Republicans - KEEP UP THE GREAT WORK!!!
__________________________________________________
KKKarl Rove sez, “We’re doing a heckuva job on immigration”….. BAHAHAHAHAHAHAHHA! You republicowards really are KKKarl….. lmao.
They can’t do anything right. I want Lou Dobbs for pres.
Um, theHOUSINGbubbleblog - heellllllloooooo????
Neither side has many saints to count as their own. Truly idealistic folks cannot succeed in the war zone. Get off of it. Those of you (not all) who are proclaiming their side’s righteousness are acting like religious freekos who refuse to accept that you just might be wrong - and probably are.
“Those of you (not all) who are proclaiming their side’s righteousness are acting like religious freekos who refuse to accept that you just might be wrong - and probably are. ”
Ahhh…. you mean the CONservative republican base?
Paranoia
“Ahhh…. you mean the CONservative republican base? ”
Precisely. YOU are acting like THEM. This is not a compliment. In your endless attacks on those with whom you hold a grudge, did you not notice that my remarks, while REFERENCING a specific group, were ABOUT you?
It’s more fun to get the blindly loyal to reply.
Ben -No one wants to upset the apple cart!
Once the apple cart is in a FULL BLOWN BEAR, the Justice department will get busy. {Just as with ENRON “to little to late”}
This Bonus & Stock option issue the govenrment is just scraping the surface…Looks like Executive Pay is the next target!
Ben - i am posting here after reading about 50 comments below.
This story about corporate culture is an important issue.
However the BIG story in this news is that Fannie & Freddie, that provide 40% of all new issuance in the $3.1trillion mortgage markets……….MUST MAINTAIN its assets at 12/31/2005 levels. Which requires negative growth from here on in to get back in balance for 2006.
Now if the banks can’t pack up all their bad mortgage risks to these guys :
1) Bank incomes will drop from fees on these loans
2) Far less loans will be underwritten
3) FNM & FRE’s new issuance is limited to “cashflow” from monthly payments and portfolio income.
4) US Treasury markets just lost some big players - less liquidity.
5) Their stocks should trade like a giant stoggy preferred. No growth, only dividend returns.
ECONOMICS 101 - restrict supply price goes UP!…Mortgage rates will cost more. Marginal borrowers will be shut out of the market!
It’s just FNM, not FRE that has to keep it’s portfolio at 2005 levels. But it’s not the guarantee portfolio, it’s the investment portfolio. Guarantee is about 2 trillion and their investment is 750B or so. They can’t (FNM) profit from the SPREAD anymore.
The securitization engine is still running. This doesn’t affect that.
This is THE largest scandal in our lifetime that involves many layers of government and corporate greed and fraud. This will make the Enron’s look like pikers.
I expect the usual circus congressional hearing costing millions that will result in jail time for some minro players while the bankers, and higher ups elude conviction.
We as tax payers are once again going to be left holding the tab to the tune of billions.
This is THE largest scandal in our lifetime that involves many layers of government and corporate greed and fraud. This will make the Enron’s look like pikers.
Right on the money, BIG DADDY!!!!!!!!!!!!!
I really wonder how solid the big bundles of loan packages sold to the investors were . There has been something very wrong here in the way of loan underwriting and the check and balance system . I think D rated notes have been sold as if they are A rated loans notes. I’m just waiting for the whole story to unfold with time .
Spitzer is too busy running for public office.
This is just plain pathetic. I can’t even begin to express my disgust.
We’re starting to look worse than Argentina. Vincente Fox is supposed to be visiting the US. Maybe he’s giving Bush some tips on how to bury the scandal while pocketing some extra cash for retirement.
Comment by climber
2006-05-23 08:46:51
Spitzer is too busy running for public office.
This is just plain pathetic. I can’t even begin to express my disgust.
We’re starting to look worse than Argentina. Vincente Fox is supposed to be visiting the US. Maybe he’s giving Bush some tips on how to bury the scandal while pocketing some extra cash for retirement.
____________________________________________________
The completed sellout by this Commander in Thief leaves us speechless.
I believe trading of FNM is still halted.
grim
- Why was FNM trade halted?
- Why did the stock rally when the halt ended?
- When will market forces finally override whatever form of manipulation is propping up FNM’s stock price?
Only a fine - no restrictions. Business as usual.
re: only a fine, no restrictions:
PBS interviewed James Lockhart tonight. He said they WERE restricting FNM in one respect: they will no longer be able to hold mortgages. They can still sell them off, but no holding.
My question: what , if anything, are the ramifications of that restriction?
Nope, it’s up about 2%.
No one will pay attention to this as long as someone is still making money. When housing is decidedly unprofitable, people will look for scapegoats.
that’s what I think too…
only RE bears like those blogging here will see this report as a big deal, unless and until housing seriously tanks.
I think the markets are probably relieved that it wasn’t worse..that the report didn’t say that FannieMae is probably *currently* totally bankrupt; so the report is actually good news!
“…senior management deceived investors…”
“…management manipulated accounting…”
“…senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders…”
“…“‘A combination of factors led Fannie Mae senior management, through their actions and inactions, to commit or tolerate a wide variety of unsafe and unsound practices and conditions…”
“…excessive risk taking and poor risk management …”
***********************************************************************
Wow! How do all those pension fund managers feel now as they sit with billions of dollars of Fannie securities. I wonder if any of them are calling their lawyers to see what their potential liabilities are as fiduciaries. Did they meet their ficuciary obligations by investing billions in securities of a company that was widely known to have serious problems and did not provide audited financial statements? The NYSE requires all listed companies to provide audited financial statements so that investors can have trustworthy information upon which they can base their investment decisions. Somehow the NYSE looked the other way while Fannie passed deadline after deadline without providing audited statements.
So fund managers who held huge positions of Fannie securities were really flying blind. Might be some irritated beneficiary of a pension fund somewhere who will bring suit against the fund managers claiming they are personally liable because they failed to perform their fiduciary duties.
Might win,too. You just never know.
They manipulated their earnings, but it’s not like the whole company is a fraud. It MAY become bankrupt if the mortgages it holds go unpaid and through foreclosure.
But OFHEO already knows the market value of MBS and debt securities and derivatives FNM has, and it’s still solvent. The accounting recognition of losses on derivatives vs unrealized GAINS on MBS it holds are actually very complex.
FNM probably won’t sell off that much on this news. It’s been expected. The bond market doesn’t really care about FNM the stock company, only the MBS and the collateral.
Yes the whole company is a fraud. Anyone who claims that free markets should be allowed and then proclaims that a GSE is a good thing is hypocritical. (I’m not directing this at you personally brianb). Mortgage backed securities are a farce as well when they are used in monetization schemes. When the Fed began allowing MBS as collateral in Open Market Operations all I could think at that point was “Assignats anyone?” Monetizing mortgages is one more gigantic brick in a precarious unreforced wall of debt.
Fannie is highly solvent, and the fine is a small dent in their bottom line. As someone who used to work at 4000 Wisconsin NW, I suggest that this is just the START of what will be uncovered. The weath of Fannie Mae is in its HUGE hedge fund / portfolio of stocks, commodities and other holding. This is where they park the money they are making from everyones mortgages. At one point it was stated that if every loan went bad they might still survive based on the (I think) Billions+ in the portfolio.
Kinda hard to know if Fannie is still solvent without any financial statements that one can rely on, seems to me. And let’s not forget that that massive collection of questionable mortgages rides on a tiny sliver of equity at the bottom of their balance sheet. Won’t take a whole lot of bad mortgages to sink this ship.
There are many issues here. But the fraud and mistatements concern GAAP accounting, the market value of these instruments was known to the market and OFHEO and on THAT BASIS FNM is still solvent.
I don’t say that GSE’s are a good thing.
The REAL issue is that if there is a significant downturn in the economy, FNM COULD go bankrupt. It is required to hold .5% of liabilities as capital, IIRC. So if it insures 1B in mortgages, it has 50M in capital. The reality of that capital hasn’t been called into question by OFHEO. If it had, the market for FNM would tank. And no, it isn’t completely a rigged market, as the stock is down from 80 or so 5 YEARS AGO.
If FNM and FRE are wiped out, due to portfolio defaults (which wouldn’t be their fault as they are REQUIRED to buy mortgages from banks, that’s what they were created for), it would throw a monkey wrench into the economy. That’s the risk.
FNM and FRE also have MBS portfolios for “investment” which they back by issuing their own paper. That is a side issue, I believe. They actually are holding capital to back these portfolios (2.5%, IIRC), which could be used to back up failing mortgages as well.
If they sink, it will be due to the mortgage defaults (over which they have no control) and guarantees associated therein and not their investment in MBS.
I may be so ignorant of the workings of Fannie and Freddie and their instruments that I shouldn’t ask this question: 0.5% and 2.5% seem like pretty tiny little numbers to me, relative to a large move in a market. What am I missing?
Thanks for your insights brian.
.5% and 2.5% are relatively small amounts.
.5% is capital to guaranteed mortgages, whereby mortgages are 80% LTV and capped at (currently) 350K or so. Above 80% needs PMI or a 20% piggyback, IIRC. So they are “protected” as long as the banks holding the 20% don’t go under. But still have some risk.
That’s the business they were CREATED for. Making mortgages more affordable by providing a guarantee and thus making a secondary market.
They also HOLD some of their own MBS. They thus have interest rate risk. Thus the “hedges” and “derivatives” and “hedge accounting”. The 2.5% isn’t much relative to the interest rate risk, but the interest rate risk is “managed” via derivatives, etc. They run “scenarios” to see how they do in various interest rate environments. That is the source of their “risk based capital”.
Anyway, long story short, FNM violated ACCOUNTING rules concerning accounting for their derivative hedges. They tried to defer market losses on those (because the assets they were protecting are on the books at historical cost not market). It’s very complex.
Basically the guarantee is simple business but if the whole housing market crashes it could ruin them. They have thin capital relative to the total risks which are in the trillions of mortgages guaranteed.
The “portfolio” business is more profitable overall, it’s similar to a bank’s business. If not managed correctly, it could be disasterous (thus the comments about “systematic” risk).
I disagree that the whole company is a fraud. As for the “easy money”, that’s what they are designed to do and CREATED to do. The buy all conforming mortgages from banks. They don’t lower the banks standards though. They don’t own, IIRC, negative amort loans or insure them. Those are held by banks.
Wouldn’t this in turn imply that if the housing market downdraft continues and FNM does implode, that banks would not continue lending on mortages unless they were completely covered (tightening lending standards since they don’t have a GSE to easily offload them to) thus adding to more downward pressure on the market?
I understand what FNM was created to do, I just don’t agree with the “easy money” concept and the level of risk that is created with such an entity.
Do you have any insights on how FNM determines the level of risk in the mortgages they purchase from the orginating lenders? The stories about homeless people having mortgages purchased by FNM gives me the shudders.
Thanks again brianb.
FNM loans are capped at $417,000. That is the conforming loan limit.
Fannie is actually required to have 30% above the .45% and 2.5% statutory requirements (as a result of OFHEO’s discovery of the initial onset of this mess). So they effectivly have to hold .59% of guaranteed obligations and 3.25% of assets. javascript:changeCommentSize(80)
larger size
Incidentally at year end (the last classification) both were subtantially above the requirement.
If so, it is puzzling why they don’t just come clean with those financials. I am not an accountant, but some who post here claim that Fannie could have produced them long ago if it were really in their interests to do so, and if they are so highly solvent as you suggest, I believe we would have seen the evidence by now.
If FNM went under, banks would have to fund the mortgages themselves. The link between pension, insurance, mutual funds and the home borrower would be over.
AS for dead people getting mortgages, that isn’t really FNM’s fault, they’re not the underwriter. If a bank signs papers saying the guy is real, what can they do? I guess they could have their own investigators.
As for the financials, they have to re-do thousands and thousands of derivative trades over many years. They have to analyze them all to see if they would have qualified for “hedge accounting treatment” (deferral of gains and losses) or have to be marked to market. It’s an absolute nightmare. I’m surprised they even have to do it. They should just mark everything to market and start from there with a clean balance sheet. Previous earnings and when they occured is kind of irrelevent to the future health.
The accounting for these is highly complex (what they are doing is creating models for what their derivatives should have been worth for the past now 5 years). It’s exceedingly math heavy, and you have to get managment, auditor, and regulator approval for every assumption you make. It’s not just, yep we own these items and they paid this much this quarter. It’s the 10 year swaption rate dropped 3 bps this month, how does that impact the value of all of our derivatives. More importantly should we be using a moving average OAS (and how long) to value our mortgage assets or a spot rate. What interest only instruments best give us an unbiased OAS? Very smart reasonable people can come to very different answeres to those questions, to issue financials you have to have all of them agree. Then present it to their boss, their bosses boss, the VP, the CEO, and then the auditors.
The fund managers feel just fine. GSE securities are guaranteed by the government despite all claims to the contrary. The de facto guarantee comes from the FEDs new role as underwriter of all risks taken in the markets.
“…de facto guarantee…”
Really? I never heard of a de facto guarantee. Where did you see that? Seems to me that there is a perception that the government will back Fannie’s obligations but nothing formally committing them to do that. And recently there have been those who have made a point to say that there is no such guarantee.
Perhaps you can expand on the “FEDs new role as underwriter of all risks taken in the markets.” That is quite a broad undertaking, I must say. Funny that I hadn’t heard of it before now.
“I never heard of a de facto guarantee.”
The de facto guarantee has to do with the doctrine of “too big to fail,” which, simply stated, means that if the failure of a financial entity is perceived to create too large a risk to the world economy, then the Working Group on Financial Markets (aka Plunge Protection Team) will come to the rescue.
“Where did you see that?”
Some of us saw it in the Federal Reserve-structured LTCM bailout after the global market meltdown in 1998. Lots of hedge fund entrepreneurs saw it, and this is why we have a large multiple of the 1998 hedge fund problem looming over the world economy today like the Sword of Damacles.
Bull, it is a MORAL obligation - implied that is. The GSE’s have twisted this into a quasi guarantee.
They ( FNMA FHLMC) are public companies not government entities. The only government backed bonds are treasuries, etc.
I alwasy chuckle at the uniformed that espouse ” Government guaranteed!’” Hogwash..
From FNMA’s website…
http://www.fanniemae.com/aboutfm/understanding/index.jhtml?p=About+Fannie+Mae&s=Understanding+Fannie+Mae
“Fannie Mae is a private, shareholder-owned company that works to make sure mortgage money is available for people in communities all across America. We do not lend money directly to home buyers. Instead, we work with lenders to make sure they don’t run out of mortgage funds, so more people can achieve their goal of homeownership..
Fannie Mae stock (FNM) is actively traded on the New York Stock Exchange and other exchanges and is part of the Standard & Poor’s 500 Composite Stock Price Index.
In 1938, the Federal government established Fannie Mae to expand the flow of mortgage money by creating a secondary market. Fannie Mae was authorized to buy Federal Housing Administration (FHA)-insured mortgages, thereby replenishing the supply of lendable money.
In 1968, Fannie Mae became a private company operating with private capital on a self-sustaining basis. Its role was expanded to buy mortgages beyond traditional government loan limits, reaching out to a broader cross-section of Americans.
Today, Fannie Mae operates under a congressional charter that directs us to channel our efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans. Yet Fannie Mae receives no government funding or backing, and we are one of the nation’s largest taxpayers.”
Furthermore,from ther FAQ section, “Frequently Asked Questions
A Private Company
Is Fannie Mae a private company or is it part of the government?
——————————————————————————–
Fannie Mae is a private company, owned entirely by its shareholders. We use private risk capital to help families of modest means achieve homeownership, and operate under a congressional charter to make homeownership more affordable to low- and moderate-income borrowers. In addition to demonstrably lowering mortgage rates, we ensure that mortgage credit is available in all areas of the country, under all economic conditions. Since 1968, we have provided more than 63 million homeowners with more than $6.3 trillion in housing finance. Elements of this effort have included, for the first time, widespread availability of low down payment mortgages for lower-income families who, without access to such mortgage products, might never be able to become homeowners.
Last Revised: April 13, 2006 ”
Sorry folks,,, NO GOVERNMENT FUNDING OR BACKING.
SOX what?
Lucky you, you are not corporate IT!
SOX is regulatory process that is supposed to ensure that the electronic data that is presented and reported is true and correct and free from any manipulation on the “back end” (i.e. within the corporate accounting computer systems)
“Sarbanes-Oxley Act
The U.S. government’s attempt to bring honesty, clarity and speed to corporate financial reporting, this legislation may ultimately require costly overhauls of budgeting, reporting and decision-support systems. “
Well actually the IT part is just SOX section 404. Working corp IT for a Fortune 25 company, I have enough painful first-hand knowledge of it myself (by the time its all done for the fiscal year, my bosses have heard me say “I quit!” a half-dozen times). The other sections deal with accounting departments, disclosure, other ugy subjects. It’s all a curse.
But as other commenters have shown, FNM doesn’t seem to have to follow the same rules as other supposedly corporate entities. Any other stock with the tardy record of financial reporting that FNM has would have been delisted from the NYSE.
$400 million is chump change for this outfit. That’s just a little more than 4X the boss’s salary. And why did they call it a “settlement?” Was Fannie allowed to sit at a table with OFHEO and bicker over the amount of the fine? 10 years at Super Max at least for these jerks.
The talk once the re-statement started was that “people would be going to jail” once everything was done. Hard to tell if that was joking around or if the execs knew they were dirty.
Fannie Mae Announces Investor/Analyst Conference Call
WASHINGTON, DC — Fannie Mae (FNM\NYSE) will host a conference call for the investment community on Tuesday, May 23, 2006, at 4:30 p.m. Eastern Time. Stephen B. Ashley, Chairman of the Board, and Daniel H. Mudd, President and Chief Executive Officer, will host the call.
The dial-in number for the call is 1-866-206-7204 or, for international callers, 703-639-1114. The confirmation code is 830762. Please dial in 5 to 10 minutes prior to the start of the call.
The conference call will be webcast at http://www.fanniemae.com and will be available for 30 days after the call. There also will be a replay of the call available for two weeks starting at 8:00 p.m. on May 23rd through midnight on June 6th. The replay number for the call is 1-800-475-6701 or, for international callers, 320-365-3844. The confirmation code is 830762.
OFHEO’s report on Fannie Mae’s accounting procedures is chilling. Larger parts of the housing industrial complex iceberg have now been uncovered.
“As we posted this morning, Mortgage giant Fannie Mae will announce today that it has agreed to pay more than $400 million as part of a settlement with the government to resolve allegations of accounting misdeeds. (WSJ Law Blog)”
It is encouraging to see the government beggining to reign in the housing industrial complex. However, it is too little, too late.
David
http://bubblemeter.blogspot.com
I often wonder how many Americans have their retirement 401k accounts loaded with Fannie’s MBS junk marketed as retirement quality instruments. Little wonder so many leaders would like to do away with the second amendment. This is just the beginning of the beginning.
I am telling you, the MBS fundamentals are still there. While we are talking about the bubble imploding here (and rightly so) it will only take a small % to make that happen. Statistically the vast majority of folks do NOT get in over their head, and DO make their payments like clockwork.
We are going to have a rough ride while we shed the bilge that should never have been there (suicide loans, speculation) but once that is burning on runway, we will recover and be healthy again. It will likely take a decade or more, but we will be MUCH better for it.
Agreed on the credit quality of the typical Fannie/Freddie borrower. My bigger concern is the valuation run up caused by combination of speculator, limited income verification (no doc, no ratio, stated, and toxic mortgages (IO, subprime, option ARM). How many Fannie Mae borrowers took out cash out refi’s or obtained 100% financing on properties in bubble areas? How much MBS paper will hold up if quite a bit of the borrowers are underwater? Even if they have 30 year fixed loans, it will still be a long time before they build up equity the old fashioned way (paying back the loan). The system has never been tested like this before. It will be interesting to see how this plays out. Maybe the borrowers do pay back the money? One thing is for sure, I hope they like their homes, they are going to be there for a while.
It doesn’t matter, as the cash outs, and secondary notes would be junior claims to GSE paper.
Fannie is forbidden from making 100% financing (they might be lending the first 80%) but someone else is giving a leveraged lender the remaining 20% (again with a junior lein).
Also, the conforming loan limit (currently only 410,000 (since January) it tracks the HPI and was around $380k last year, kept them from participating as fully in the bubble regions as private capital.
They’ve been rattled pretty hard before, In 1980 Fannie was insolevent, but they survived that period too (because most people do pay their mortgage).
I’ll find it tremendously ironic, if the scary accounting issues kept Fannie and Freddie from participating in the market when the really terrible credits were written.
We are going to have a rough ride while we shed the bilge that should never have been there (suicide loans, speculation) but once that is burning on runway, we will recover and be healthy again. It will likely take a decade or more, but we will be MUCH better for it.
——————————————————-
There is a lot of truth in that statement, but I have to argue there is unprecendented leverage in this market and it isn’t a small percentage who are in too deep. It may be 25% or more which in finance is just plain overwhelming.
For any that missed this link on the condition of the Phx market have a look for yourself. You can listen to the commentary by clicking the link at the top of the page if you want a realtor’s spin on things.
http://www.homesalenews.com/prices/1_Phoenix_Market_At_Glance.htm
The markets clearly don’t feel that the FNM financial imbroglios are all that big of a deal. The stock is only off a few pennies in today’s trading. Of course, investors know that FNM can’t go belly up (i.e. the government would bail them out), so why should they be worrying? Heck, why would anyone in their right mind by a T-bill when they can buy an FNM bond that has a higher rate of return? They are both backed by the US government, so only a fool would take the security with the lower return.
“…why would anyone in their right mind by a T-bill when they can buy an FNM bond that has a higher rate of return? They are both backed by the US government, so only a fool would take the security with the lower return.”
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The government is explicitly obligated to repay T-bills. It is NOT explicitly obligated to pay Fannies bills. There is a widely held perception that the government will back Fannie’s obligations but I have never seen anything that says that it is so-obligated. Have you?
FNM’s bonds are explicity not backed by the gov’t. As to what it would do in the event of default…no one knows. Kind of a “too big to fail” thing.
FNM’s bonds are explicity not backed by the gov’t. As to what it would do in the event of default…no one knows. Kind of a “too big to fail” thing.
Exactly. Too many people here are getting hung up on parsing the government’s lack of “official” or “legal” obligation to bail out Fannie/Freddie, while forgetting that it’s Congress that WRITES & RE-WRITES THE LAWS in the first place. If it comes down to a taxpayer funded GSE bailout or total meltdown in the financial markets (which will mean legions of very angry voters), politicians will choose bailout every time –just to save their own jobs.
The GSEs “de facto” guarantee is not a myth — it means “political” guarantee. See LTCM and 1990s S&L bailout for details.
but there is a big possibility that bail out of the GSE will only be a fraction of the full obligation.
One big difference between the S&L’s and a possible GSE bailout. The feds had to bail out the S&L’s because the banks loaned out FDIC insured deposits. They had no choice but to try to get the money back for their depositors. With the Fannie MBS bonds, it’s just a bad investment for the bondholders, just like anybody else . The only conceivable reason the feds would bail out Fannie or Freddie because the cash spigot would be turned off by MBS investors and in turn tank the real estate market.
FNM stock recently opened again and it is actually up! UP $0.69 to $50.96, unreal!!!!
Just another piece of the puzzle I can’t figure out, bad news isn’t so bad so it’s good news to wall street, but left a company be off by .05 percent on there quarterly earning and wall street beats them to death. I think it’s time to go buy a 5 million dollar house on my meager salary, I know I’ll be approved!
Half of the people employed on Wall st has are professional worriers (even more than here :), as a result bad news is rarely as bad is the worriers were expecting it to be so stocks more often then not go up on the announcment of expected bad news. Just as they go down on expected good news (because the other half are professional Pangloss disciples). Very few companies can legitimatly beat their everything is ideal worldview for more than a year (MS was able to for almost a decade).
franklin raines announced today that he will return all bonuses he recieved while at fannie mae,with interest.”to make amends i intend to spend the rest of my life as an unpaid volunteer for nambla”
Absolute power, corrupts absolutely.
Are any of us really surprised by the whole mess. All I can say is that our founding fathers are rolling over in their graves. They were not the most ethical or moral of men, but they realized it and tried to build a country based on that fact, knowing full well that most leaders wil fall into some sort of corruption. I liked the one post about how we are worse than Argentina. Just keep in mind, things are only going to get worse. As for the second amendment, the government already believes you shouldn’t have a gun. These guys in D.C. are scared to death, for the most part. They know that without the military they are toast. However, unlike 200+ years ago, we don’t stand a chance against this government.
I would not bet on that. Much more repressive regimes have fallen to much lesser pressures. Look at how just a minor change in attitude took down the old soviet union. The bigger the disconnect, the easier it will fall. Right now, we have a lot of liberties compared with the rest of human history, where liberty was only for the elite! We can speak, move, and pretty much do what we want. We can even stop paying all our bills and declare BK. In the old days, you would go to debtors prison, and if you died, your son took your place.
What we need to do is be vigilant of our rights, and we do have the power after all. Most of us here have chosen to not buy into a mania, and with that power we are bringing the mania to an end. That and of course this blog…
“Earlier this month, the International Center for Prison Studies at King’s College London released its annual World Prison Population List. And there, standing proudly at the head of the line, towering far above all others, is that shining city on the hill, the United States of America. But strangely enough, the Bush gang and its media sycophants failed to celebrate — or even note — yet another instance where a triumphant America leads the world. Where are the cheering hordes shouting “U.S.A! U.S.A!” at the news that the land of the free imprisons more people than any other country in the world, both in raw numbers and as a percentage of its population?…
A nation’s true values can be measured in how it treats the poor, the weak, the damaged, the unconnected. For more than 30 years, the answer of the U.S. power structure has been clear: You lock them up, shut them up, grind them down — and make big bucks in the process.”
May 19, 2006 Moscow Times http://tinyurl.com/r7ahp
We have more money that any other country in the world, doesn’t it stand to reason that we can therfore afford to keep more of our criminals off of the street?
If Cuba released all of their prisoners onto the streets and declared “We have no criminals, just look at how empty our prisons are!” Would you believe it?
Yes we have places in America with high crime but, unlike France, which has fewer in prison, we don’t have poverty pervasive enough to lead to month long riots.
As a country we have more money, however our country’s standard of living is pretty far from the highest (10th) and dropping. The net result is 30 - 45 % of the population believe we are currently in a recession, we have become a single issue political state (2004 - Abortion, 2006 -Immigration), about 80% of the U.S. labor force has seen real weekly earnings decline 16% over the past 33 years, according to government statistics. Unfortunately we are not currently able to compete on the Global Market, other than with speculative Bubbles.
Remember the Watts riots? It’s probably more a function of localized intense poverty in France, however. LA is the country’s most segregated big city, both in diversity and volume.
You go hoz, USA is becoming or probably is already a third world country. The only reason we don’t have riots is because of a lack of education, even those that are suffering think that this country has the best standard of living in the world, hey,, they would be way worse off in a country…say like France…
Cuba DID release all their prisoners - they came to the3 USA. Muriel boatlift. Anyone remember? if not, go see the movie “Scarface”.
OT: As long as prisoners are there for breaking a law , law which are fair and passed in a democratic way, and the prisoner has access to judicial system to present his side of the case, the NUMBER of prisoners only tell so many people BROKE the law.
In that case it is not fault of judicial system but the society.
I think that the high incarceration rate is due in part to an efficient judicial system. (Efficient does not equal just). Most countries, and specially down in LATAM, have very bad judicial systems, that in fact either keep you in jail almost indefinitively without a trial (and yes, we have the same in Guantanamo, but they are for the most part, not citizens), or will allow you to almost indefinitively avoid trial, and therefore not go to jail.
I consider myself poor, and I am not under any threat of going to jail. I do not deal drugs out of my apartment (sorry, Luxury Condo) window in broad day light, or go driving around while highly intoxicated. Neither do I go around beating the living daylights out of my wife, or go pimping for something to steal. Look at your statitistics and see how much of it is drug related. Agreed that the war on drugs is a failure, but we keep buying into the Kool aid that incarcerating drug felons is going to lower consumption. I will not get into that here, as this is Home Bubble blog, not a drug bubble blog!.
over 60% of the incarcerated haven’t been convicted of a crime. They are in various stages of ajudication. Would you want to spend a year in jail before your trial just because you weren’t rich enough to bail out, and then get acquitted? If it were closer to 90%, I might feel a bit better about it, but holding people without trials violates the constitution if you ask me.
However, unlike 200+ years ago, we don’t stand a chance against this government.
Not so… nukes are lousy for crowd control.
TJ - clever rationale.
They know that without the military they are toast. However, unlike 200+ years ago, we don’t stand a chance against this government
80 million guns in the hands of US citizens say different.
As demonstrated in NO-it only takes about 72 hours to go from civilized government to armed anarchy.
The urban chucks in heavy gun control states like NY,NJ, MA are the ones who are “toast”.
I’ve yet to see a “This house has no guns in it and we are proud of that” type sign in any yard in the country. Why in the world not, if these people are true believers?
How about, “This town is unarmed. Y’all be good, now!” Would love to see someone run on that platform.
“Fannie Mae senior management sought to interfere with OFHEO’s special examination by directing the Enterprise’s lobbyists to use their ties to Congressional staff to 1) generate a Congressional request for the IG of HUD to investigate OFHEO’s conduct of that examination and 2) insert into an appropriations bill language that would reduce the agency’s appropriations until the Director of OFHEO was replaced.” -from summary of Special Examination
makes Jack Abramoff look like Abraham Lincoln.
All of the Fannie Mae senior management should be tossed in the clink w/o ever being released. They can share quarters with compadres Bernie Ebbers, Ken Lay, and the other corporate criminals who have destroyed what had been good companies. All of the folks involved (including lower level who “knew”) should serve time. Any that claim they didn’t should be showing why they didn’t.
Nah - Club Gitmo… I hear there is room next to Osama’s maid
The report “shows that Fannie Mae’s faults were not limited to violating accounting and corporate governance standards, but included excessive risk-taking and poor risk management as well,” Randal Quarles, Treasury undersecretary for domestic finance, said in a statement. “OFHEO’s findings are a clear warning about the very real risk the improperly-managed investment portfolios of (Fannie Mae and Freddie Mac) pose to the greater financial system.”
Personally, I couldn’t care less about the bonuses and salaries these guys got (well, not that much, anyway). But this quote to me is the heart of the story–how this bubble was further blown by FNM’s excessive risk-taking and the poor risk management of its products. In other words, way too much risky money flooding housing markets the country over. It’ll be fascinating to see how if at all these practices are reigned in…
It wasn’t credit risk they were taking (Congress greatly limited their ability to speculate on credit in the original statutes).
This raises the very important issue of derivatives. Fannie has used derivatives in hedging credit risks by its own admission. But how extensively and for what, if any, other purposes is not known. Derivatives carry risk as we all know. Orange County’s bankruptcy, the demise of Long Term Capital Management, and Nick Leeson’s destruction of a fine old bank all attest to this. Volatile markets pose a danger to derivatives which are complex contracts which are triggered by certain exongenous factors. Volatility raises the risk of unexpected triggering.
Unfortunately, some derivatives are so complex that only the PhD’s that structured them understand them. This leaves management highly exposed. We need to know what we can about the derivative exposure at Fannie. Kinda doubt that we will find out much on that score somehow.
Oh. My. God.
I always thought the report would sugar coat everything. There are 2 possibilities:
1) the report is being candid and honest. This is shocking. I expected a huge govt cover-up combined with bailout. This report seems to fly in the face of that
2) they ARE sugar coating the report. If that is the case it is terrifying. If this report is sugarcoated, a financial meltdown could be in the works, which would REQUIRE a coverup/bailout to keep our monetary system functioning.
this bodes poorly. (except for FNM stock for some reason)
clouseau
I had the same worries. I think that it is pretty much direct, but there is more behind the wall of obfuscation that will come out once they complete the restatement.
This episode will trigger closer oversight, which will in turn uncover more problems. Luckily its only a small number of people in the store who are crooked, and in my opinion the MBS business is still going to do just fine / as should be expected in the collapsing housing market.
For example, as Ben pointed out here that there seems to be a lack of selling going on in long established areas. Those people are still paying on their mortgages. As long as that is a considerable majority, the core of this thing will stay going. It will suck for a while, but it won’t collapse.
This episode has taught that if you are big enough and use enough lobbyists and congressional donations, then you are above the law. Plain and simple.
This episode has taught that if you are big enough and use enough lobbyists and congressional donations, then you are above the law. Plain and simple.
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It’s way too early to say what this episode has taught.
“‘By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders’…federal regulators said Tuesday in announcing a $400 million settlement with the company.”
With the company? Sounds like they are fining the shareholders for a manipulation that victimized the shareholders. How about some money back from the executives?
all of the money that these senior executives have (ALL ASSETS) should be seized.
And they threw Martha Stewart in jail for $400,000…. Way to go Spitzer.
Apparently, “too big to fail” applies not only to corporations, but also to the executives who run them…
“The regulator found that $52 million of former Chief Executive Raines’ $90 million in compensation was linked to earnings. ‘The OFHEO report shows that Fannie Mae’s faults were not limited to violating accounting and corporate governance standards, but included excessive risk taking and poor risk management as well,’ said Treasury Undersecretary Randal Quarles.”
So much for the previously glorified notion that linking executive pay to corporate earnings would result in better CEO performance… Instead, at least in this case (not to mention a few other notable examples like WorldCom and Enron), they led to massive accounting fraud designed to inflate earnings and, by extension, CEO plunder.
I don’t see what the problem is with the government using the RICO statutes and prosecuting things like for exactly what they are: a criminal enterprise. Prosecuters should cast a wide net and entangle anyone who was remotely connected with the conspiracy. This policy of throwing a few scapegoats in prison is bogus. A clear message needs to be sent.
The truly sad part of all this is that, for all of us hard working, tax paying citizens we need another revolution. Mind you, not to change the basic structure of our government but to throw out the self-interest serving little twerps who run it.
I jut heard an interview with James Lockhart, the guy with OFHEO. He said FNM does basically 2 things:
1) bundles mortgages to sell off to others and
2) holds mortgages themselves.
He said, from now on they will not be allowed to hold mortgages themselves. He didn’t elaborate.
If FNM can no lomger hold mortgages themselves, won’t that take a bite out of the mortgage industry?
What effect will this have on things?
A few years ago, Fannie had processed 3 trillion in mortgages. Two were bundled and sold and one was held on their balance sheet.
Anyone know what it is now?
having Fannie and Freddie with a “de facto” backing from the federal government I think kept mortgage rates 50 to 75 basis points below what they would have been without them in place. If you read the entire OFHEO report from a few years back they basically had no accounting and risk management oversight in place. No testing for hedge effectiveness and they were accounting for their hedging incorrectly. Changes in value when marking to market for certain types of hedging must flow through to the income statement.
FAS 133
The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation.
For a derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.
For a derivative designated as hedging the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge), the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.
For a derivative designated as hedging the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income (outside earnings) as part of the cumulative translation adjustment. The accounting for a fair value hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of an unrecognized firm commitment or an available-for-sale security. Similarly, the accounting for a cash flow hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of a foreign-currency-denominated forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change.
Thank you, Tbizzle!