Fannie Mae And Freddie Mac Executives Focus On Profits And “Outright Greed” Have Cost Taxpayes “Hundreds Of Billions Of Dollars”

10 12 2008

“The CEOs of Fannie and Freddie made reckless bets that led to the downfall of their companies,” said House Oversight and Government Reform chairman Henry Waxman, a California Democrat. “Their actions could cost taxpayers hundreds of billions of dollars.”

“Outright fraud and greed wasn’t isolated to just Wall Street,” Mr Issa said. “Fannie and Freddie shared in this disgrace as it drove much of the poor decision-making that have led us to where we are today.”,28124,24779115-20142,00.html


Republicans struck an even harsher tone. California’s Darrell Issa said the two government-sponsored enterprises, or GSEs, were “a primary cause, if not the primary cause” of the collapse of the housing market.

Lawmakers cited thousands of documents collected by the committee that Mr Waxman said “show that the companies made irresponsible investments” that destabilised the firms and forced the Government to put the companies in conservatorship in September.

Specifically, the panel released a June 2005 presentation made by former Fannie CEO Daniel Mudd that suggested the firm should move away from the traditional mortgage market in order to take advantage of the growing sub-prime and non-prime loan businesses.

“If we do not seriously invest in these ‘underground’ type efforts and the market changes prove to be secular, we risk: becoming a niche player; becoming less of a market leader; becoming less relevant to the secondary market,” the presentation slides said.

Fannie, the slides showed, could “meet the market where the market is” by accepting higher risk and more volatile earnings.

Mr Waxman said: “Their own risk managers raised warning after warning about the dangers of investing heavily in the sub-prime and the alternative mortgage market. But these warnings were ignored.”

Mr Mudd, along with other former executives from the two firms, defended their decision to expand into non-traditional mortgage businesses. Richard Syron, the former Freddie CEO who was forced out when the Government took over the firms in September, cited the legal and regulatory mandates the firms had to meet because they are congressionally chartered.

“We had obligations to Congress and to the public to promote our chartered purposes of increasing affordability, liquidity and stability in housing finance, which included some very specific low-income housing goals,” Mr Syron said.

Franklin Raines, the former Clinton-administration official who served as Fannie chief executive before leaving the firm in late 2004 following an accounting scandal, said Wall Street firms caused the housing crisis, not the GSEs. He blamed the crisis on the entrance of many new investors into the mortgage-backed securities (MBS) market, whom he said were “not natural holders of 30-year obligations”.

“When the market began to drop, these players panicked, drove down the prices of MBS, and dried up the liquidity of the market,” Mr. Raines said.

He noted that in 2004, the firm’s share of the secondary mortgage market dropped sharply as the firm was restricted from buying or guaranteeing riskier Alt-A mortgage loans, which required little or no verification of borrowers’ income.

Mr Raines said Fannie Mae followed “a lot of smart investors” when it decided to take on more risk after 2004, but he argued that Fannie Mae was a late entrant into the market for risky mortgages.

“By the time the GSE began its most significant investments in riskier loans in 2005, the roots of the present crisis had long taken hold,” Mr Raines said. “If anything, Fannie Mae played catch-up to the banks and investment banks who drove the securitisation of the most toxic sub-prime mortgages.”

While Mr Raines said Fannie Mae’s executives were responsible for its decision to dive into to Alt-A mortgages, he questioned why the firm’s regulator didn’t seek to limit its credit risk.

“It is remarkable that during the period that Fannie Mae substantially increased its exposure to credit risk, its regulator made no visible effort to enforce any limits,” he said.

Mr Mudd also took the opportunity to suggest that the Treasury Department and the firms’ regulator, the Federal Housing Finance Agency, didn’t have to take the dramatic step of placing the firms in conservatorship. He suggested that a capital injection like those now being enjoyed by the banking industry through Treasury’s Troubled Asset Relief Program, or TARP, would have been appropriate.

“I made the argument at the time and proposed that more modest government support could be used to encourage private investment capital – basically something more like the program many banks are now eligible for,” Mr Mudd said.

He also said lawmakers and the next administration need to decide on the future role of the GSEs – whether it be as public or private companies.

“Events have shown how difficult it is to balance financial, capital, market, housing, shareholder, bondholder, homeowner, private and public interests in a crisis of these proportions,” Mr Mudd said.

Republican John Tierney grilled Mr Mudd about the documents shedding light on Fannie Mae’s dilemma about jumping into riskier loans.

Mr Mudd explained that the presentation was intended to paint the choice very starkly, suggesting that executives did not actually believe the worst-case scenario would come to pass.

But he also acknowledged that Fannie Mae faced pressures to respond to the explosion in risky lending lest it continue to lose market share to competitors. “We couldn’t afford to make the bet that the changes were not going to be permanent,” he said.

Mr Issa expressed frustration that the four former chief executives declined to pin more blame on Fannie and Freddie for the housing crisis. He said they all “seem to be in complete denial” that Fannie and Freddie had anything to do with this.

He challenged them to agree that if they could go back and change their actions they would ensure the mortgage giants didn’t help finance loans that ultimately proved unaffordable to borrowers.

Without singling out Fannie or Freddie, the former executives agreed that lax underwriting standards had helped cause the crisis.

Mr Mudd said that, with perfect hindsight, the loans should have been better underwritten.
Mr Raines said, “Proper underwriting standards could have averted many of the losses.”




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