Fannie Mae and Freddie Mac

were allowed to hold less capital than normal financial institutions: e.g., they were allowed to
sell mortgage-backed securities with only half as much capital backing them up as would be
required of other financial institutions. Regulations exist through the FDIC Bank Holding
Company Act that govern the solvency of financial institutions. The regulations require normal
financial institutions to maintain a capital/asset ratio greater than or equal to 3%.[72] The GSEs,
Fannie Mae and Freddie Mac, are exempt from this capital/asset ratio requirement and can,
and often do, maintain a capital/asset ratio less than 3%. The additional leverage allows for
greater returns in good times, but put the companies at greater risk in bad times, such as
during the subprime mortgage crisis. FNMA is not exempt from state and local taxes. In
addition, FNMA and FHLMC are exempt from SEC filing requirements; they file SEC 10-K and
10-Q reports, but many other reports, such as certain reports regarding their REMIC mortgage
securities, are not filed.

Lastly, money market funds have diversification requirements, so that not more than 5% of
assets may be from the same issuer. That is, a worst-case default would drop a fund not more
than five percent. However, these rules do not apply to Fannie and Freddie. It would not be
unusual to find a fund that had the vast majority of its assets in Fannie and Freddie debt.[citation
needed]

In 1996, the Congressional Budget Office wrote "there have been no federal appropriations for
cash payments or guarantee subsidies. But in the place of federal funds the government
provides considerable unpriced benefits to the enterprises... Government-sponsored
enterprises are costly to the government and taxpayers... the benefit is currently worth $6.5
billion annually.".[73]

Accounting[edit]
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FNMA is a financial corporation which uses derivatives to "hedge" its cash flow. Derivative
products it uses include interest rate swaps and options to enter interest rate swaps ("pay-fixed
swaps", "receive-fixed swaps", "basis swaps", "interest rate caps and swaptions", "forward
starting swaps"). Duration gap is a financial and accounting term for the difference between the
duration of assets and liabilities, and is typically used by banks, pension funds, or other
financial institutions to measure their risk due to changes in the interest rate. "The company
said that in April its average duration gap widened to plus 3 months in April from zero in
March." "The Washington-based company aims to keep its duration gap between minus 6
months to plus 6 months. From September 2003 to March, the gap has run between plus to
minus one month."

Controversies[edit]
Accounting controversy[edit]
In late 2004, Fannie Mae was under investigation for its accounting practices. The Office of
Federal Housing Enterprise Oversight released a report[74] on September 20, 2004, alleging
widespread accounting errors.

Fannie Mae was expected to spend more than $1 billion in 2006 alone to complete its internal
audit and bring it closer to compliance. The necessary restatement was expected to cost $10.8
billion, but was completed at a total cost of $6.3 billion in restated earnings as listed in Fannie
Mae's Annual Report on Form 10-K.[75]

Concerns with business and accounting practices at Fannie Mae predate the scandal itself. On
June 15, 2000, the House Banking Subcommittee On Capital Markets, Securities And
Government-Sponsored Enterprises held hearings on Fannie Mae.[76]

On December 18, 2006, U.S. regulators filed 101 civil charges against chief executive Franklin
Raines; chief financial officer J. Timothy Howard; and the former controller Leanne G. Spencer.
The three were accused of manipulating Fannie Mae earnings to maximize their bonuses. The
lawsuit sought to recoup more than $115 million in bonus payments, collectively accrued by the
trio from 1998 to 2004, and about $100 million in penalties for their involvement in the
accounting scandal. After 8 years of litigation, in 2012, a summary judgment was issued
clearing the trio, indicating the government had insufficient evidence that would enable any jury
to find the defendants guilty.[77]

Conflict of interest[edit]
Further information: Countrywide financial political loan scandal and Angelo Mozilo § Friends of
Angelo (FOA) VIP program

In June 2008, the Wall Street Journal reported that two former CEOs of Fannie Mae, James A.
Johnson and Franklin Raines had received loans below market rate fromCountrywide
Financial. Fannie Mae was the biggest buyer of Countrywide's mortgages.[78] The "Friends of
Angelo" VIP Countrywide loan program included many people from Fannie Mae; lawyers,
executives, etc.[79]

Fannie Mae and Freddie Mac have given contributions to lawmakers currently sitting on
committees that primarily regulate their industry: The House Financial Services Committee; the
Senate Banking, Housing & Urban Affairs Committee; or the Senate Finance Committee.[citation
needed]
The others have seats on the powerful Appropriations or Ways & Means committees, are
members of the congressional leadership or have run for president.

2011 SEC charges[edit]

In December 2011, six Fannie Mae and Freddie Mac executives including Daniel Mudd were
charged by the U.S. Securities and Exchange Commission with securities fraud.[80]"The SEC
alleges they 'knew and approved of' misleading statements claiming the companies had
minimal exposure to subprime loans at the height of home mortgage bubble."[81] Former
Freddie chief financial officer Anthony “Buddy” Piszel, who in February, 2011, was CFO
of CoreLogic, "had received a notice from the SEC that the agency was considering taking
action against him". He then resigned from CoreLogic. Piszel was not among the executives
charged in December 2011.[82] Piszel had been succeeded at Freddie by David Kellermann.
Kellermann committed suicide during his tenure at Freddie.

A contemporaneous report on the SEC charges continued:

The SEC said Mudd’s misconduct included knowingly giving false testimony to Congress.

Mudd said last week that the government approved Fannie Mae’s disclosures during his
tenure.

“Now it appears that the government has negotiated a deal to hold the government, and
government-appointed executives who have signed the same disclosures since my departure,
blameless – so that it can sue individuals it fired years ago,” he said in a statement last week.[82]

2011 lawsuits[edit]
In 2011, the agency had a number of other big banks in the crosshairs as well. JPMorgan
(JPM) was one of 18 financial institutions the FHFA sued back in 2011, accusing them of
selling Fannie and Freddie securities that "had different and more risky characteristics than the
descriptions contained in the marketing and sales materials". Fannie and Freddie, the
government-backed housing finance firms, sustained massive losses on mortgage-backed
securities as the housing market imploded, requiring a bailout of over $187 billion. The firms
have been controlled by the FHFA since their 2008 rescue. Swiss lender UBS has already
reached an $885 million settlement with the FHFA in connection with losses Fannie and
Freddie sustained on over $6.4 billion worth of mortgage securities. The agency also settled for
undisclosed sums earlier this year with Citigroup (C) andGeneral Electric (GE). The FHFA is
reportedly seeking $4 billion from JPMorgan to resolve its claims over $33 billion worth of
securities sold to Fannie and Freddie by JPMorgan,Bear and WaMu. Bank of America (BAC),
which acquired Countrywide and Merrill Lynch during the crisis era, could be on the hook for
even more. The Charlotte-based firm is facing claims from the FHFA over $57 billion worth of
mortgage bonds. In all, the 18 FHFA lawsuits cover more than $200 billion in allegedly
misrepresented securities. The question of whether any individual bankers will be held to
account is another matter. Thus far, criminal cases related to the packaging and sale of
mortgage-backed securities have been conspicuously absent. The proposed JPMorgan
settlement covers only civil charges, and would not settle the question of whether any
individual executives engaged in wrongdoing. There is an ongoing federal criminal probe
based in Sacramento, Calif., the state where Washington Mutual was based. JPMorgan
originally sought to be protected from any criminal charges as part of this deal, but that request
was rejected by the government.[83]