Yea Cher, “If I could turn back time...”

Fannie Wasted $2 Billion and Much More

The Financial Accounting Standards Board (FASB) blinked last week—just before Congress forced it—and announced changes in its “mark-to-market” accounting requirements, noting that concept may not be appropriate, as in times when there are no “market” prices from which to mark your securities.

This burst of logic and institutional insight came a few years too late for Fannie Mae, which challenged FASB, in 2003, when it first proposed the accounting change.

Fannie did not challenge M2M per se, but did object to FASB’s plan to require businesses only to M2M their hedging transaction and not simultaneously requiring the same treatment to the underlying assets they were hedging.

Tim Howard, Fannie’s CFO, argued--in 2003—that FASB was not illuminating corporate balance sheets but creating financial distortions with this disparate treatment.

Fannie’s objections and those of many other firms were unheeded, dismissed and FASB approved mark to market mandates and they became standard accounting practice.

Fannie Mae thought it had a way to accommodate FASB’s desire, but—in 2004--the SEC--in what I always will believe was a political hatchet job directed from the Bush White House for sins of previous senior Fannie officials who were active Democrats--opined that Fannie “wasn’t on the same page with FASB.”

Given fresh red meat by the Bush team, the anti-GSE lobby turned it into cries of outrage and charges that Fannie’s books were bad and its officials were trying to reap bonuses on results of their cooked bookkeeping. (And, those were the nice things they said!)

(Apologies to Dr. Seuss) “What Did the New Fannie Crew Then Do?”


In late 2004, Fannie’s Chairman and CEO, Frank Raines left Fannie Mae, insisting the company did not intentionally defy FASB. Other heads rolled, reputations forever were sullied and Fannie Vice Chairman, Dan Mudd, a Republican, become the new Chairman/CEO and promptly approved paying over $400 million in fines, which some labeled “admissions of guilt.” Mudd went on then to spend over $2.2 billion of corporate dollars to clean up the old books and make them compliant with the new FASB rule and ultimately with the SEC’s requirements.

To “repair” the books—meaning recast millions and millions of mortgage transactions to fit the new FASB norm--Mudd brought hundreds of contract auditors into the Fannie headquarters, had them squatting in every nook and cranny. Every available inch, plus new rented spaces were taken over and replaced. The headquarters cafeteria gave way to desks and cubicles; executive office spaces were relocated and reduced, so that auditors could go over millions of mortgage transactions from the previous several years and “package them, according to the new FASB 133.” Corporate operations were significantly disrupted as this “required” work was carried out.

But the damage was done. Fannie’s institutional reputation was sullied in a way that no explanation would clean up. The company lost whatever industry and political support it once enjoyed, as, mainly, the Right now had the cudgels to batter the GSEs, and batter and bash they did and mightily.

The recent FASB rollback of M2M caused me to wonder how much of that truly was necessary, although the political scourging of Fannie made some of it mandatory.

Roughly five years have passed and FASB now guts FASB 133 and meekly says, “Um, oh, mark to market, well maybe it isn’t always appropriate and maybe we shouldn’t have promulgated it in the way we did.”

Too late for Fannie’s shareholders and the $2 billion it spent comply with something that now has changed; too late for ruined lives and careers; and too late for Dan Mudd, the Fannie CEO whose business calls lead the company down the tubes when he approved purchases of Alt A mortgages and Private Label Subprime (PLS) mortgage securities, in 2006 and 2007. That desperate step—similar to ones taken by executives throughout Wall Street and elsewhere--was disastrous, a money losing proposition, which caused the Treasury to ask Mudd to leave his job and depart the premises.

It is not hard to envision a different scenario and a far different result.

Had FASB did not go down the M2M road it did with FASB 133, it would have been tough for the SEC to allow itself to be ideologically used and claim Fannie Mae failed to meet the FASB 133 requirements (which now have been junked). Fannie never would have had the management disruptions and Mr. Mudd never would have had to make the tortured decision to invest in the toxic subprime loans, because his predecessor—Franklin Raines--still would have been in charge and Raines never would have countenanced that subprime acquisition.

Sing it, Cher!

Why Did We Make Them “Private Companies?”

About six months after the outgoing Bush Administration appointed him head of Freddie Mac, David Moffett walked away from the job bitching about government bureaucracy and interference with management’s decision making. The latter, presumably, from the Federal Housing Finance Agency, which has been named by Treasury to guide day-to-day operations of Freddie and Fannie Mae.

The problem is that GSE decision making, historically, is more minute by minute, than “day by day,” let alone longer intervals.

Now, in a recent filing with the SEC, Freddie’s claims that FHFA is undermining Freddie’s ability to make a profit,” which—I guess—the company still is supposed to do, since it has some private shareholders in addition to the Treasury which helped itself to 80% ownership of both companies when they, essentially, nationalized Fannie and Freddie late last year.

FHFA and its Director, Jim Lockhart, reportedly blinked, after Freddie officials threatened to take their complaint to the SEC, and allowed Freddie to note its FHFA disagreement in the company’s 10Q filing.

Nobody likes to be reminded of “details,” but there was a reason that Congress created Fannie and Freddie as “private companies” with federal charters, when it had the option to put that desired secondary market execution inside the federal government at HUD or in the FHA.

Congress didn’t want government employees and government bureaucrats making private market decisions, which often require closure in seconds, minutes, or hours, not days, weeks and months.

Yet, this is what now is happening as government bureaucrats try and run these companies, pretending they have the same instincts and priorities. They just don’t.

Congress Should Choose!

This leads me into the latest brouhaha over some financial benefits, retention bonuses, or whatever GSE and FHFA managers are calling the additional comp they want to expend on the companies employees, who now will be helping the Treasury and other regulatory agencies with their mortgage tasks and not working solely on Fannie and Freddie matters.

When compensation is the issue, the natural reaction from the Hill is to bail and condemn Fannie and Freddie for some perceived shortcoming. (Note to Neanderthals,” see previous FASB item.) The GOP tried that during the recent presidential campaign and it didn’t help John McCain. Some R’s continue to make this bogus charge against Fannie and Freddie but convince few people who know the identity of the real villains in the subprime mess. (The toxic mortgage assets, which have brought down financial services firms all over the world and put our government in “the toxic mortgage business,” are almost exclusively “PLS” or “Private Label Securities, issued by Wall Street investment banking firms not Fannie and Freddie. Face it GOP, they mostly were your guys.)

The Obama Administration did not give HUD, FHA, or Ginnie Mae new responsibilities with regard to the government mission to acquire, manage, and sell hundreds of billion of dollars in toxic assets. Those government agencies just are not up to the job. They don’t have the talent, experience, or skills to do what needs to be done. Instead, Treasury is looking to the former GSEs to take on a significant share of this load.

This gets me back to all of the noise that comes out when the secondary market “firms” (Yes, Fannie and Freddie still are traded on the NY Stock Exchange) and their regulator agree to increase employee compensation and folks on Capitol Hill immediate threaten and moan.

Congress could say, “Don’t pay them one penny more” and then watch as Fannie and Freddie employee morale plummets and the work force slowly melts away as other opportunities present themselves. Or, it could give HUD the task and let FHA and/or Ginnie Mae carry out identifying, pricing, and managing hundreds of billions in toxic mortgage assets.

The best option is for Congress, wisely, to just butt out and let Fannie and Freddie officials, their regulator, and the Treasury work out those matters.

Maloni 4-7-2009