Wednesday, September 26, 2012


The Wheels of Justice Turn….

Judge Leon, the Fed, and Mitt-Speak

Initially, I planned to comment on the outrageous Mitt Romney remarks—taped at a Florida fundraiser—and the candidate’s and his handlers’ subsequent spin on those. I also wanted to add some perspective on the Fed’s recent QE3 action.

I’ll do both, but later in the blog.

My priorities changed late last week, when federal judge Richard Leon issued a summary judgment decision to Frank Raines and dismissed a major Fannie Mae shareholder lawsuit, filed 8 years ago against him.

If the nation’s capital--which once was consumed by Fannie Mae (with some still being obsessed)--carefully reads the opinion and realizes how early allegations were used to attack the company and its officers, they should arrive at the conclusion that Fannie Mae’s business and political enemies engaged in a violent, sustained ideological assault on the mortgage giant.
(It’s worth noting, as of this writing, the Washington Post hasn’t written one word about the Leon decision, let alone any speculation of its significance.)

The lawsuit’s plaintiffs justified their suit based on allegations first made in 2004 by Fannie Mae’s regulator--The Office of Financial Enterprise Oversight (OFHEO), now renamed the Federal Housing Finance Agency (FHFA). That report--alleging securities violations based on unacceptable company implementation of new Financial Accounting Standards Board (FASB) accounting standards.

OFHEO’s venomous tome later was seconded by the Securities and Exchange Commission (SEC), in effect a George W. Bush administration partisan “double team.” (See discussion of “Project Noriega” in “All the Devils are Here,” the book by Bethany McLean and Joe Nocera.)

When OFHEO first came out against Raines and Fannie, most Fannie allies believed, correctly in my view, this was a political hatchet job having little to do with real accounting issues. It just was another conservative ploy—relying on willing Bush financial regulators--to go along and besmirch Fannie Mae and its officers.

The Speed and Destruction of Lies

But the reputation and systemic carnage began to flow almost immediately as the charges of fraud and big bonuses.

Eight years later, Judge Leon wrote that Raines did not knowingly violate those accounting rules nor was he aware of any such violations, reminding me of comments attributed to Mark Twain (although never verified as his), “A lie can travel halfway round the world while the truth is putting on its shoes.”

In my opinion, the initial OFHEO report reflected a professionally overmatched regulator, lagging but unable to keep up with its responsibilities (an entirely separate story), trying to smear Fannie Mae officials.

OFHEO long had coordinated its actions with Fannie’s business and ideological opponents, which then joined the regulator and the SEC to assail and batter the company.

My friend and former Fannie colleague Barry Zigas wrote a review of the decision, with an excellent discussion of Judge Leon’s ruling and its meaning.

Here is a link to Barry’s work.

Barry may have overstated things a bit, however, when he wrote it was "not in dispute" that "the company misapplied generally accepted accounting principles in a number of areas."

In the minds of many, the GAAP issue was and still is “in dispute.”

In 2004, the SEC's Chief Accountant opined that Fannie Mae misapplied GAAP only in two areas, FAS 133 (accounting for derivatives) and FAS 91 (accounting for the premium and discount on mortgage purchases).
Some believe that this SEC official ruled against Fannie Mae because OFHEO was so insistent that he do so and by going along he also appeased some White House bully boys.

What’s not in dispute is that two years later a new/different SEC Chief Accountant approved the same types of FAS 133 applications as Fannie Mae had been using in 2004, the applications which caused OFHEO to attack the company in its sham accounting finding.

At the time, the 2004 OFHEO report was added to a bubbling cauldron of anti-GSE witch’s brew, featuring GOP and conservative think tank attacks on former Fannie Mae Democrats spiced with charges of fraud tied to enhanced compensation.

 When The Good People Leave?

The thugs, who managed to assail the integrity of Raines and other company officials, likely planted the seeds of the subprime debacle created when all of good folks the GOP considered “bad guys” left the company and their successors leaped face first into the subprime trough.

In dismissing Raines from the suit--roughly 96 months after hired guns and their ideologue associates used the new and confusing accounting rules (since changed by FASB, in recognition of some of the issues Fannie first raised)--the court now has made clear that the accusations of fraud against Raines were wholly invented by OFHEO.

After so much lying, skullduggery, and Fannie Mae scapegoating, Judge Leon’s decision needs recognition and context, based on accumulated the damage which flowed from a tarnished and imperfect regulatory accounting review.

As noted, Washington takes no prisoners and it’s a mean town where truth travels glacially while lies speed.

Here is a link to Judge Leon’s decision on Raines.

The Fed’s QE3 and the Romney Gaffes

In the comments section of my last blog, I noted how surprised I was by the timing of the Fed’s QE3 action buying $40 billion of mortgage bonds each month until the economy starts to rejuvenate and unemployment falls.

As noted, I don’t think the Federal Reserve decision was partisan or politically craven. But, the timing may have been Bernanke’s subtle way of smacking down Mitt Romney who has roamed the country telling audiences his intent to fire Bernanke if he wins the White House.

Recent news reports on QE3 say the big banks are not lending the new money, claiming if rates fall, they won’t be able to keep up with the demand. What they are not saying is that the more they hold onto the cash, the more money they make.

Mitt Said What?

Republican presidential candidate Mitt Romney offered the following GOP political wisdom to a group of contributors, as recorded at a May 2012 Florida fundraiser.

"There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what….These are people who pay no income tax.... [M]y job is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives."

As soon as those remarks were made public, somebody needed to help Mitt remove his foot from his mouth. But Romney--not recanting his patronizing and political heresy--now appears to be doubling down. (Of course it does give voters something else to discuss beyond Mitt's mystery tax returns.).

This was the Weekly Standard’s William Kristol’s sharp rebuke for Romney’s fundraiser comments.
It's worth recalling that a good chunk of the 47 percent who don't pay income taxes are Romney supporters—especially of course seniors (who might well "believe they are entitled to heath care," a position Romney agrees with), as well as many lower-income Americans (including men and women serving in the military) who think conservative policies are better for the country even if they're not getting a tax cut under the Romney plan. So Romney seems to have contempt not just for the Democrats who oppose him, but for tens of millions who intend to vote for him.

Is everything federal bad, including mortgages?

One mortgage finance takeaway from Romney dissing almost half the nation is that his “47%” includes the more than 5 million or so families and individuals whose loans—made by commercial banks and their subsidiaries (pre-QE3)—have been turned into safe and liquid Fannie Mae and Freddie Mac mortgage backed securities, since 2008, when the Bush Administration took over the mortgage giants making them wards of the federal government.

And then there are the millions more families (voters) whose mortgages came directly through the government’s Federal Housing Administration’s (FHA) insurance program.

Those of you with FHA or GSE mortgage loans should take umbrage when Romney says you believe you are “victims,” who want the federal government to take care of you, and that you won’t take responsibility for your own lives.

All this Romney abuse because you took out a mortgage loan? It gets worse.

If Governor Romney's remarks are believable, as he campaigns to become your President, he won’t concern himself with you forty seven percenters.
Take that to the polling booth with you.
GOP incumbents and first time office seekers already are racing away from Mitt Romney’s political hari kari tendencies.

Maloni, 9-26-2012

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