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Worldwide Raines Faults Regulators for Fannie, Freddie Missteps (Update3)
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By Dawn Kopecki
Politics
Law Dec. 9 (Bloomberg) -- Former Fannie Mae
Environment Chief Executive Officer Franklin Raines
Invest faulted regulators and housing officials for
Science encouraging the mortgage-finance company
Opinion and its competitor Freddie Mac to expand
Spend into riskier loans with limited oversight.
Sports
Arts and Culture “It is remarkable that during the period that
Editors' Video Fannie Mae substantially increased its
Picks exposure to credit risk its regulator made no visible effort to enforce any
Bloomberg limits,” Raines, 59, who was ousted in 2004 and accused of accounting
Markets manipulation, told the House Oversight and Government Reform Committee in
Magazine Washington today. Raines’s successor Daniel Mudd, and former Freddie Mac
Special Report CEOs Richard Syron and Leland Brendsel also testified.
“All four of you seem to be in complete denial that Fannie and Freddie are in
any way responsible for this,” said Issa of California, the ranking Republican on
the committee. “You’re either standing behind the mandate of Congress or your
mandate of your stockholders or perhaps the mandate of your bonus packages
and you’re telling us everyone’s doing it.”
Mudd, who was ousted as part of the government’s takeover, as well as Syron
and Brendsel told the committee that it was a struggle to meet the companies’
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Two Masters
“There was a bigger problem than the regulator, and it was the inherent conflict
in the governance structure,” Vogel said. “They were trying to appease their
shareholders, and trying to serve their mission.”
Fannie and Freddie, which traded near $70 a share last year, have lost more
than 97 percent of market value since as the housing slump deepened and the
government took control of the companies and said the focus would be on
helping homeowners even at the expense of profitability. Fannie fell 4 cents to
80 cents today in New York Stock Exchange composite trading. Freddie was
down 3 cents to 81 cents.
Raines argued that the companies’ main regulator, the Office of Federal
Housing Enterprise Oversight, didn’t seek to restrict the amount of credit risk
the companies were allowed to assume.
“Indeed, right up until the time Fannie Mae was placed into conservatorship,
the director of Ofheo maintained that the company was well capitalized,”
Raines said.
Full Compliance
Ofheo, which was reorganized with expanded powers this year as the Federal
Housing Finance Agency, placed the companies in conservatorship after
regulators discovered that losses at the largest sources of U.S. mortgage
financing were preventing them from fulfilling their mission, officials have since
said.
Up until the companies were seized, Mudd, 50, said the FHFA “declared us in
full compliance with our capital requirements.”
All the CEOs “have an ax to grind, they’re trying to save themselves and save
their reputations,” said Bert Ely of Ely & Co., a bank consulting firm in
Alexandria, Virginia.
Waxman cited internal documents that show Fannie and Freddie’s then CEOs
Mudd and Syron ignored warnings as the companies delved deeper into
subprime and other nontraditional mortgage products in the pursuit of higher
profits.
Waxman Documents
“These documents make clear that Fannie Mae and Freddie Mac knew what
they were doing, Waxman said. “Their own risk managers raised warning after
warning about the dangers of investing heavily in the subprime and alternative
mortgage markets.”
“The choice was presented relatively starkly in order to identify what the key
issues were,” Mudd said in response to a question from Representative John
Tierney, 57, a Massachusetts Democrat.
Perfect Hindsight
The companies ramped up their business with risky loans as the housing boom
turned into a boost. Freddie’s purchase of subprime and Alt-A securities totaled
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$158 billion in 2006 and 2007, or 13 percent of all those bonds created.
Fannie’s share was 5 percent. Fannie and Freddie also guarantee $470 billion to
$873 billion of debt backed by borrowers with credit scores below 700 out of a
possible 850, less than 20 percent of the starting equity in their homes, or both,
according to calculations by FTN Financial in Memphis, Tennessee, based on
public disclosures.
“In perfect hindsight, I think we always wish that we hadn’t bought them,”
Syron said. “But given the information that we had at the time and given the
balance we were trying to achieve, we thought we were making the right
decision.”
Issa did say that Congress deserves some of the blame for repeatedly pressuring
Fannie and Freddie to extend mortgage credit to disadvantaged borrowers.
“We have to recognize that what we’ve done with the GSE’s hasn’t worked,”
Issa said. “We in the Congress have to look in the mirror, because part of the
blame is on our doorstep.”
Mudd said the takeover of Fannie was unnecessary, and a “more modest” form
of government action would have been enough to keep the business sound.
“While I deeply respect the myriad challenges facing the Treasury Department
and the regulator, I did not believe that conservatorship was the best solution
for Fannie Mae,” Mudd said in his testimony. Mudd said he argued for “more
modest government support” that could have been used to raise private capital,
“basically something more like the program many banks are eligible for now,”
according to the testimony.
No Man’s Land
Mudd said lawmakers ought to rethink the structure of Fannie and Freddie as
shareholder-owned companies with a public mission and “whether the economy
would be better served by fully private or fully public” government-sponsored
enterprises. With the U.S. housing market in a “freefall,” he said the companies
could not “flourish” under the constraints of a business model that required
them to support the entire market.
“I would advocate moving the GSEs out of No Man’s Land,” Mudd said.
“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.”
“The GSE model is a far from perfect way to achieve the goal of using private
capital to achieve the public purpose of homeownership and affordable rental
housing,” Raines said. “However, if the public policy goal remains the same, it
will be hard to find a model that has more benefits and fewer demerits than the
model that worked reasonably well for almost seven decades at Fannie Mae.”
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