Jackson Jambalaya

OFHEO (Office of Federal Enterprise Oversight) published a scathing report in May, 2006 regarding the state of Fannie Mae and Freddie Mac. The Bush administration sought to reform the agencies as it documented a culture focused on hiding the truth while paying its executives hundreds of millions of dollars. The agencies waged total war against reform, seeking to destroy all opposition as they bullied their way into bankruptcy (See http://online.wsj.com/article/SB121677050160675397.html for a great read on Fannie's tactics.).

While the agencies stifled all criticism, they engaged in reckless lending policies. No down payment loans given to borrowers with 580 credit scores and 55% debt to income ratios with reduced mortgage insurance premiums. Mortgages were approved for borrowers requiring no verification of income or assets, yet the borrower only had to provide a five percent down payment. Borrowers could even buy TEN properties with only ten percent down on stated income programs (verified assets were required). Mortgages given to borrowers with 540 credit scores. Similar programs were provided to lenders and borrowers which encouraged an "anything goes" culture. However, all good things, if it can be called that, must come to an end and the Fannie Mae party is no exception to this cliche'. See earlier post: Fannie and Freddie's Ticking Time Bomb http://kingfish1935.blogspot.com/2007/12/fannie-and-freddies-ticking-time-bomb.html

The agency chickens have now come home to roost, as the Democrats have put us on the hook for HUNDREDS of billions of dollars, while former Fannie CEO and Clinton Administration official Frank Raines keeps nearly $100 million he received from Fannie Mae.

OFHEO's report stated:
Fannie Mae senior management promoted an image of the Enterprise as one of the lowest-risk financial institutions in the world and as “best in class” in terms of risk management, financial reporting, internal control, and corporate governance. The findings in this report show that risks at Fannie Mae were greatly understated and that the image was false.

During the period covered by this report—1998 to mid-2004—Fannie Mae reported extremely smooth profit growth and hit announced targets for earnings per share precisely each quarter. Those achievements were illusions deliberately and systematically created by the Enterprise’s senior management with the aid of inappropriate accounting and improper earnings management.

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. Earnings management made a significant contribution to the compensation of Fannie Mae Chairman and CEO Franklin Raines, which totaled over $90 million from 1998 through 2003...

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. Those factors included the Enterprise’s enormous financial resources and political influence, the expectation that senior management could write the rules that applied to Fannie Mae, financial rewards tied to a measure of profits that management could easily manipulate, and the relative disinterest of senior executives in adhering to standards of prudent business operations....

The image of Fannie Mae communicated by Mr. Raines and his inner circle and
promoted by the Enterprise’s corporate culture was false. In the words of one current member of Fannie Mae’s Board of Directors, the picture of the Enterprise as a “best-in-class” financial institution was a “façade.” To maintain that façade, senior executives worked strenuously to hide Fannie Mae’s operational deficiencies and significant risk exposures from outside observers—the Board of Directors, its external auditor, OFHEO, the Congress, and the public. ...

The existence of a federal agency with the ability to regulate the Enterprise represented a
direct challenge to senior management. To deal with that challenge, Fannie Mae took the
extreme position that OFHEO simply had little authority over the Enterprise, while Fannie Mae’s lobbyists worked to insure that the agency was poorly funded and its budget remained subject to approval in the annual appropriations process. The goal of senior management was
straightforward: to force OFHEO to rely on the Enterprise for information and expertise to such a degree that Fannie Mae would essentially be regulated only by itself....."

Finally, in a statement quoted almost directly from Bernie Ebbers and Worldcom, OFHEO reports: "The message from Mr. Raines was clear: EPS results mattered, not how they were
achieved...."
http://www.ofheo.gov/media/pdf/FNMSPECIALEXAM.PDF


Enjoy the trillion-dollar bailout while you worry about lipstick politics.

Frank Raines's politican donations: http://www.newsmeat.com/ceo_political_donations/Franklin_Raines.php