Friday, February 1, 2013

Another Hit

The Fabulous Fiderer Rides Again
Bing, Bang, Boom, Boom, Boom !!

In my last blog, I linked an article by David Fiderer, a long time New York based financial services analyst , who has logged tons of hours going over all of the available public documents surrounding a fatuous but destructive 2004 regulatory allegation of “securities fraud,” lodged against three Fannie Mae senior executives by its then regulator the Office of Financial Housing Enterprise Oversight (OFHEO).

The regulator--employing its own interpretation --claimed the company had intentionally misapplied a new Financial Accounting Standards Accounting rule (FASB 133) to hide business weakness.

At the time, Fannie Mae's enemies picked up that handy cudgel, overwhelmed the Hill with the shorthand that, “Fannie's regulator says it cooked its books and then paid their officers big bonuses.”

It was a devastating allegation and did far more harm than even the most diehard opponent could want, since it ultimately destabilized the nation's entire mortgage market before the Treasury Department stepped in and took over Fannie and Freddie in 2008.

It was a groundless charge, but it sounded good and then all Hell hit Fannie, as its friends, allies, and supporters ran from it.

Senior Fannie officials were forced out and then very bad things happened when their successors made poor business decisions and red ink begun spurting from Fannie's books.

The SEC Piles On

To add to the fun of seeing a long time GOP political target publicly wounded, Chris Cox, George W. Bush's chosen head of the Securities Exchange Commission (SEC), and his team jumped on and said, “We agree with OFHEO. Fannie Mae missed the relevant accounting rules by a mile.”

Those allegations and implications lingered for eight years--ruining careers, reputations, costing the government millions in defense costs, and near crippling the mortgage finance system--until Federal Judge Richard Leon issued three decisions dismissing charges against the Fannie execs, citing no information/facts among the 65 million hearings pages that could lead any jury to find them guilty.

The Judge did not comment on what motivated OFHEO and SEC officials to come after the company and its senior leaders.

In “All the Devils Are Here,” the Bethany McLean and Joe Nocera, book on that era, the authors referenced a covert campaign called “Project Noriega,” in which the Bush Administration and conservative allies hoped to cripple Fannie and its operations.

Would the Bush appointees have engaged in that kind of BS and lied in those 2004 reports?

Would they say say/do things for the benefit of Fannie's business and political opponents and stagger a multibillion dollar corporation which was at the heart of the nation's efficient secondary mortgage market? Would they do this to a company that Republicans seemed to intensely dislike?

That's like accusing President Bush and his advisers of starting a costly and senseless war over nonexistent military intelligence and sending thousands of Americans to die while those military costs enriched a cadre of political supporters embedded in major defense industries.

Fiderer to the Rescue

David Fiderer, writing in Op Ed News a week ago, discussed the 2004 OFHEO and SEC regulatory treachery and Judge Leon's rulings.

This week in the same venue, Fiderer looks carefully at the very complex original Fas133 proposal, how many companies beyond Fannie failed to properly implement it, and why the major accounting firms all seemed to agree what Fannie had done was entirely correct?

Long after the charges against Fannie's top people, the national accounting firms collectively agreed not only was Fannie's early application of FAS 133 right (meaning OFHEO and SEC were wrong), but those same firms began giving their own financial service clients the exact same Fannie Mae implementation directions.

That deserves repeating.

After examining the FASB 133 history and purposes and how Fannie Mae initially had complied with the new rule, the nation's major accounting firms opined what Fannie had done was proper.

Fiderer certainly raises the question of why two Bush regulatory agencies tried to cripple Fannie Mae and the damage those campaigns produced.

Anyone who thinks they knew/know Fannie Mae and what happened to it before its descent into sub prime Hell, should closely read Fiderer's work.

Here is the link to his most recent article, from Jan. 28 (Fiderer #2), and I also link last week's (Fiderer#1), so they can be read serially. Fiderer's second article mirrors the same excellent research that was in his first.

I hope there will be more Fiderer's revelations, containing more evidence that craven politically driven regulators can easily ignore what is correct and lawful and willingly join a political witch hunt to wreak partisan havoc.

Congress and the media, take heed.

Maloni, 2-1-2013



This is what i am looking for ........really you made my day.
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Bill Maloni said...

Thanks, I hope!!

I am so very impressed with what Fiderer has done, primarily with his diligent research.

But then, he also writes well. He's had a lot of internal financial services experience.

The difficult part is getting people/policy makers to change their minds when--for the past eight years or more-- everything they've read or heard made Fannie to be an outlaw company.

Several have done well in that regard, Barry Ritholz, Ezra Klein, Krugman, but David Fiderer just has spent copious amounts of time going over hearings records (judicial and congressional), old media, statements, conflicting statements made previously.

I will try and link or re-print almost anything he produces.

Anonymous said...

Hey Bill...nice work lately. I always look forward to your posts on this subject. In your opinion, considering all the work from folks like Fiderer, is there any chance that 'they' let the GSEs ever stand on their own again? Or are they just too far to save at this point, regardless of the 'truth'. To be fair, I'm biased in this arguement...I'm long the prefs, and have been for a long time.

Bill Maloni said...

As I've noted before, I am an optimist (and likely naive on that score) and I think it is possible.
However, I doubt if any effort at resurrection would reward previous investors and investments, although I am not sure how that would play judicially.

Back to my optimism.

It's based on the fact that Congress, largely was flummoxed by a very effective anti-Fannie/Freddie campaign helped hugely by the OFHEO/SEC actions, which now have seem challenged, albeit 8 years after the fact.

Fiderer's work is worth its weight in diamonds in that regard, since he has no Fannie connections and has written in the past about other major rumblings (Enron).

Fannie and Freddie still are valuable and viable, just look at how they still are being employed today. The structure for a revival all is in place. They are poised to make billions.

The key to "re-privatization"--with no federal backing--is convincing a skeptical Congress that most all of their memories--save the very real post-2005 GSE subprime/Alt A acquisitions--are mostly creative myths.

All volunteers to achieve that goal are accepted.

Anonymous said...

I suspect that's probably true. For the life of me, I can't figure out what the end game is here, even if they get flushed at some point. To completely/officially nationalize these two, wouldn't they have to actually go through BK? If they do survive, in whatever form, the past obligations will have to be dealt with. I realize the govt. likes to do whatever they want, however, there are just too many jr. prefs out there. Perhaps the status quo continues forever.

Bill Maloni said...

Obviously, I don't know; but I can see the arguments being made about rewarding those who should know better, if some Senator/Member or investor suggests buying out the preferred shareholders or even paying them 50 cents on the dollar.

Again, that's why I put my original caveat about the courts in there; maybe a judge would see all of this differently and force Treasury payments.

But, as I suspect you know, the people who really got screwed--and who may have provided a market opportunity for you and others-- were the small depositories which the Paulson Treasury encouraged to buy the preferred, assuring small bank officials that it would have value.

Anonymous said...

Yes, no doubt about that. Not only the small community banks, but these jr.'s are stuffed not only there, but are all over insurance/pension accounts (big and small). I also suspect there are a number of (retail) funds that still have these on the books. However, I also know that most of these have already been impaired and have been for years. Still, I can't believe there hasn't been more uprising from the holders (ex PE/hedgies - I suspect they are interested in a low profile on this one). Given what they have done to/with these two, certainly there is a case.'re fighting the govt. Thats the problem.

Bill Maloni said...

Yes, it took Raines, Howard and Spencer 8 years before justice was done.

I am sure their legal bills, paid by the government under their corporate contracts, were in the $100 Mil range.

So plaintiffs going after the US Treasury better be prepared with a boat load of cash and that's before a Judge/jury can consider if they are right or wrong.

One thing might alter that picture and that's if all of the original investors went to court based on what Paulson told them at the time he urged them to buy the preferred.

That's a lot of small banks ("little guys")with political influence and soem resources.

Paulson's "bait and switch" actions could anger some jurists.

Anonymous said...

The investors of every other bank or institution that got bailed out were eventually "rewarded" once they repaid their debt to the government.

I don't see the difference here once the GSE's have paid back their debts. I suppose the overwhelming assumption is that the debt will never be paid back.

Bill Maloni said...

The "overwhelming assumption," plus the law.

The deal that the Fannie's signed in 2008 had a Paulson "stinker" in it which had the effect of never letting Fannie (and Freddie) pay off its debt, no matter how much they paid in the bogus 10% dividend they sent Treasury initially or what they now will send Treasury annually since the Treasury changed the deal and all of they net annual income must go to Treasury.

Over the next three or four years, alone, that could be a sizeable sum. Wait till both companies announce earnings (likely) this month and do the math.

But, unless people are smart enough to see that "pay back" reducing the amount borrowed, the government's books never will show that Fannie and Freddie repaid vast amounts of their "debt" in a relatively brief period and still continued providing secondary mortgage market services to the nation.

The 2008 machinations were a foul Paulson undertaking, but I believe that perpetual penury was very much in Paulson's mind when he took over Fannie and Freddie.

That makes it easier for the F&F haters to do their number.