Sunday, March 9, 2014

Fiderer: Now, Class, Class…?


 

 

The “Hammer” is Back; DF Returns,
Will He Deny Serenity to the Guilty?

 
 

 

Before we join accounting instructor, David “the Hebrew Hammer” Fiderer, let’s acknowledge we all need more humor in our lives. Since so many of you loyal readers sent me the “Hitler, Fannie and Freddie are profitable You Tube video” (first sender was   “Big Jam” via the blog comment section and then others passed it on to me), here is the link for all to see and enjoy!

(Please follow it to the end and absorb the delightful commentary. If anything truly offensive is being said in German, I’m “sorry” in advance.)

 




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Fiderer……..

One of the early delights in my blogging was discovering and then communicating with David Fiderer, who resides in Manhattan. We have exchanged hundreds of email comments on his or my work, and I delight in his diligent research and laser like analysis. 

Look up “wry” in the dictionary and you’ll see DF’s picture. 

The fact that he unmasked the AEI opportunists—Ed Pinto and Peter Wallison--as they argued, with much falsehood, that Fannie Mae in the 1990’s acquired billions in subprime loans spoke loudly to me, when Fiderer relied not on rhetoric but utilized detailed and multiple federal mortgage records. That data was ignored by many, including intentionally by the F&F antagonists. 

Fiderer’s diligence combating Pinto’s and Wallison’s charge, showed that these complaining AEI “Emperors” were indeed without clothes. The loans they called deficient produced some of the lowest default and foreclosure rates in the company’s history and helped generate solid Fannie earnings in that decade and well into the new one, hardly descriptors of subprime lending. 

David is deep into analysis of the corrosive regulatory mistreatment which helped sink Fannie Mae and resulted in its solid leadership being dismantled in 2004. Their corporate successor then went off the financial deep end, buying great slugs of private label subprime (PLS) which went belly up. 

An attorney, Fiderer has worked on for decades on energy and foreign commercial financial matters. 

His most recent work, which follows—not as a link—but in total, appeared last week in the National Mortgage News and--as I suggest in my blog headline and will elaborate on later--should be causing some sleepless nights for those who may have violated their regulatory roles in trying to sink Fannie Mae for political and specious private reasons. 

I know the statute of limitations has run out on the scallywags, but--reportedly--guilt still hangs heavy, or so I am told (being an innocent). 

For political and personal reasons Bush era regulatory agents tried mightily to bury Fannie and Freddie, but succeeding in leaving only a systemic mortgage finance mess, making it easy for the big financial services players to run roughshod over the markets and the federal financial regulators in the post-2005 era, something willfully ignored by many. 

A wound up Fiderer gets grade school Wonky
and explains:  “Fannie Mae Accounting
Scandal for Dummies”
 

"The Mortgage Wars," by Timothy Howard, garnered favorable reviews, though some reviewers seemed reluctant to accept the author's claim, that the government's charges against Fannie Mae, pertaining to accounting violations, were baseless and politically motivated.

They have reason to be skeptical. As Fannie's former CFO, Howard is the opposite of an unbiased party. In 2004 the allegations caused Howard, along with CEO Franklin Raines and controller Leanne Spencer, to lose their jobs. And they faced a class action lawsuit for securities fraud, which dragged on for eight years.

Finally, in late 2012, U.S. District Court Judge Richard Leon dismissed the cases against all three. He ruled that there was zero credible evidence to suggest that Howard, Raines or Spencer had ever intended to deceive anyone. He also ruled that the charge of improper earnings manipulation, which was the basis of an earlier SEC lawsuit alleging securities fraud, was not supported by evidence.

Would Regulators Deceive the Public?

Still, reviewers seem to believe that there had to be something there, that U.S. regulators would not simply fabricate bogus charges of whole cloth.

Except that is precisely what happened. The Fannie Mae "accounting scandal," is an especially timely parable to remind us how easily members of Congress and the media are bamboozled by an onslaught of doublespeak.

Remember Debits = Credits?

To make sense of it all, we need to go back to accounting basics. If you've ever taken a course in the subject, you know everything revolves around a two-part question: Where do the debits go and where do the credits go? If you can't answer that question, you are clueless. Debits and the credits, both sides of the journal, must always balance out.

So if you want to accuse somebody of an accounting violation, you must address three questions: Where are debits and credits supposed to go? Where, if anywhere, did they show up instead? How did the improper posting of debits or credits deceive others?

Fannie's accusers, the Office of Housing Enterprise Finance Oversight and the Securities and Exchange Commission, sidestepped those questions. Which is why reading through 600 pages of OFHEO reports, here and here, is largely a waste of time.

An $11 Billion Sleight of Hand

Consider how, in May 2006, an $11 billion loss suddenly emerged out of nowhere:

"Fannie Mae's accounting policies and practices did not comply with Generally Accepted Accounting Principles," said an OFHEO press release.  Consequently, "errors resulted in Fannie Mae overstating reported income and capital by a currently estimated $10.6 billion."

SEC Chairman Christopher Cox piled on. "The significance of the corporate failings at Fannie Mae cannot be overstated," he told Congress in June 2006. "The company has estimated its restatements for 2003 and 2002 and for the first two quarters of 2004, will result in at least an $11 billion reduction of previously reported net income. This will be one of the largest restatements in American corporate history."

Those claims were false and highly misleading. So that everyone understands why, here's a second grade level explanation.

Suppose Fannie wrote, in its quarterly report, "There are five toes on your right foot." Also suppose Fannie wrote, somewhere else in the same report, "There are five toes on your left foot." Fannie assumed that you could read the information in both places and figure out that you have 10 toes in total.

But Fannie's accusers read the quarterly report selectively. They saw the statement about toes on the right foot, but they ignored the statement about the left foot. Then they declared, "Fannie Mae understated the total number of toes by five! In so doing, Fannie violated generally accepted principles of podiatry. The significance of Fannie's corporate failings cannot be overstated."

Really. You cannot make this stuff up.

Here's how I would explain it to a high school student. In Fannie Mae's quarterly financial statements, it presents net income on the Income Statement, aka the Profit & Loss Statement, or P&L. In addition, Fannie presents Other Comprehensive Income somewhere else, on the Statement of on Changes in Shareholder Equity.

Because it is labeled "other" income, you should be able to figure out that this category of income is separate and distinct from income presented on the P&L. And therefore, to calculate total income, you must add the net income from the P&L with Other Comprehensive Income. Fannie's income on the P&L was positive, whereas the Other Comprehensive Income was negative.

And if you had completed Accounting 101, you'd know that you needed to add P&L income with Other Comprehensive Income in order to calculate total equity. Otherwise, the credits would not equal the debits on the balance sheet.

When the OFHEO and the SEC accused Fannie of overstating income by about $10.6 billion, they simply ignored Fannie's full disclosure of Accumulated Other Comprehensive Income, which was reported as a negative $10 billion as of June 30, 2004.

But the OFHEO and the SEC tried to deceive everyone into thinking that these losses had been kept from public view.

Remember, OFHEO and the SEC have no semantic fig leaf. Though many informally refer to Other Comprehensive Income as a "direct adjustment to equity," the accounting rules say quite clearly, that this is income (loss). Neither agency ever acknowledged that the loss had been fully disclosed to investors.

Mark-to-market Losses Always Affect Income and Always End Up on the P&L

The pretext behind the OFHEO/SEC claim, that Fannie had "overstated" its total income, was the accusation that Fannie had improperly designated its mark-to-market gains/losses on derivatives and other financial instruments.

Fannie had allocated derivative and investment losses to Other Comprehensive Income. Whereas the regulators insisted that those losses should have been properly posted on the P&L.

They read Financial Accounting Standard 133, which deals with accounting for derivatives and financial hedges, in a very particular way.

 

Does it Seem to Anyone Else…?
 

I remind blog readers all of the time that I am not a lawyer, but does it look to anyone else (lawyer or not) that OFHEO’s Armando Falcon, James Lockhart, and the SEC’s Christopher Cox, and Donald Nicoliasen—the villains in the Bush 2004 regulatory drive by shooting of Frank Raines, Tim Howard, and Leanne Garmon Spencer—could have been subject to criminal prosecution under 18 U.S.C. Section 1001, cited below? 

 

“…whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully—
(1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact;
(2) makes any materially false, fictitious, or fraudulent statement or representation; or
(3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;

shall be fined under this title, imprisoned not more than 5 years…”
 

I also remember, after its investigation of OFHEO Director Armando Falcon—requested by former Missouri Senator “Kit” Bond (R-mo.)--the HUD Inspector General made a criminal referral, recommending to the Justice Department that Falcon be indicted for exactly that type of proscribed behavior spelled out in the above statute.  

No shock and awe, that request was ignored by the Bush DOJ. 

 

What Others are Saying 

Jeffrey Dorfman calls out Obama Administration F&F investor fraud in Forbes.




Greg Myer in the Portland Oregonian suggests F&F caution to the Congress,



Jim Parrot and Mark Zandi in the American Banker suggest Congress is sniffing up wrong tree.
 





Agnes Lovas write in Bloomberg re Crimea intervention.

 



Maloni, 3-9-2014

15 comments:

Anonymous said...

The Hitler YouTube video is so true it is actually frightening. The creator is a genius and should be recognized as an architect for truth. Please thank Mr. Fiderer for us.

The Mark Zandi mention is a waste of blog space. As leader of one of the largest mortgage insurance companies, Mr. Zandi stands to benefit immensely from GSE elimination. That became most evidentt during the Senate Banking Hearings watching him and Corker act like buddies with common interest to destroy these legacy institutions. They both want to make me vomit.

As far as the accounting nonsense, this commenter nailed it;

"denigrating now are simply reversals of “one time accounting losses” from the crisis. You can’t force a company to write down an asset and declare it a loss and feign outrage at the loss and then when things improve and that same asset is now written up, dismiss the “gain” as some kind of gimmick. It doesn’t work and is hypocritical at best and outright dishonest at worst."

Anonymous said...

To anonymous above, Fiderer did not create the YouTube video.

Bill Maloni said...

Yes--Mr. Fiderer, indeed is creative, but he had nothing to do with creating the Hitler.

Whomever did, though, seemed to know his/her "onions" about mortgage finance and F&F history!

BIG JAM said...

Can we send this to CNBC so they can re-watch this, or maybe make congress watch it so they have a clue? http://www.hulu.com/watch/59026

Anonymous said...

U.S. Projects $179 Billion Profit From Fannie Mae, Freddie Mac
2014-03-10 15:39:57


By Clea Benson
March 10 (Bloomberg) -- Fannie Mae and Freddie Mac could return $179.2 billion in profits to taxpayers over the next 10 years if they continue operating under federal conservatorship, according to White House budget analysts.
The U.S.-owned mortgage-finance companies, seized by regulators during the 2008 credit crisis, have returned to profitability as the housing market recovers. By the end of this month, they will have sent $202.9 billion back to the Treasury, which counts as dividends on the U.S. investment and not repayment of the $187.5 billion they got in taxpayer aid.
The projections, released today as part of an annual analysis prepared by the Office of Management and Budget, show an increase from last year, when budget writers forecast a $51 billion profit from Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac through 2023.
Congress is working on legislation to wind down and replace the two companies. Investors in the two companies including hedge fund Perry Capital and mutual-fund firm Fairholme Capital Management have sued the U.S. challenging an arrangement in which the government takes all of the companies’ quarterly profits as dividends.

Anonymous said...

U.S. Projects $179 Billion Profit From Fannie Mae, Freddie Mac
2014-03-10 15:39:57


By Clea Benson
March 10 (Bloomberg) -- Fannie Mae and Freddie Mac could return $179.2 billion in profits to taxpayers over the next 10 years if they continue operating under federal conservatorship, according to White House budget analysts.
The U.S.-owned mortgage-finance companies, seized by regulators during the 2008 credit crisis, have returned to profitability as the housing market recovers. By the end of this month, they will have sent $202.9 billion back to the Treasury, which counts as dividends on the U.S. investment and not repayment of the $187.5 billion they got in taxpayer aid.
The projections, released today as part of an annual analysis prepared by the Office of Management and Budget, show an increase from last year, when budget writers forecast a $51 billion profit from Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac through 2023.
Congress is working on legislation to wind down and replace the two companies. Investors in the two companies including hedge fund Perry Capital and mutual-fund firm Fairholme Capital Management have sued the U.S. challenging an arrangement in which the government takes all of the companies’ quarterly profits as dividends.

Bill Maloni said...

Anon--I expect that President Obama only cares about the next two years, after that, it's someone else's problem.

BTW, that doesn't mean Obama is feckless, just that he'll be glad to be gone for lots of reasons, not just F&F issues.

Its' a hellish life in the WH.

Anonymous said...

Just when you think you couldn't get any dumber you then totally redeem yourself by including into your budget that you have effectively nationalized the GSEs! Yes folks, we have a new sequel to "Dumb and Dumber."

Bill Maloni said...

Everything surrounding the treatment of F&F, from late Bush through current Obama has been "hinky," with inconsistencies and BS. It seems to go from one questionable policy to another.

I keep preaching to those who read the blog, "Where F&F are involved, don't look for consistency and logic."

That indecision is the best thing that F&F advocates--and shareholders (not always the same)--have going for them, since it allows for a possible thoughtful response to the mess two administrations and the Hill have created.

Anonymous said...

Bill, thanks again. Any new thoughts on what you expect out of Johnson/Crapo and the reception, Senate and House, to the same?

Anonymous said...

I, too, am curious given the 'new' headlines out this morning....

GW

Bill Maloni said...

Anon and Anon(GW)--To soon to tell, but Nick's story (he's an excellent reporter, even though he works for the WSJ, which has a very anti-GSE editorial side)spells out the obstacles.

First off, haven't yet read the things they agree on.

It's important to understand that this new process is what goes on behind the scenes before a bill is announced. The fact that it now is going public is indicative of opposition to a draft "bill," ergo agreed on "principles" rather than agreed on statute.

There are four or five Dem committee members who are not going to be satisfied with Corker-Warner lite (or they would have signed up for the original). Their demands will decide whether the Committee can report legislation this year.

If the D's get too much of what they want, the leadership will lose their R supporters.

And in macro negotiations, who knows on what the committee will settle.

Nothing they approve will get past the House, but getting legislation through the Senate (which I said in my first blog this year) would be an achievement for J/C (and also might figure in it passing, since Tim Johnson is retiring at year's end.

Anonymous said...

Bill, Why is there no common sense left in Washington?

In My Opinion, THE GOVERNMENT SHOULD;

use the billions in net profits earned by the GSEs to rebuild a strong capital reserve base so that the TAXPAYER can be assured that they will never again foot the bill for another crisis. At the same time, stimulate private investment interest by reinstating dividends to all preferred and common shareholders. Treat all previous stakeholders fair who supported the previous capital market structure of mortgages so there will be future interest to invest. Transition over from MBS to market investment of some form of public utility to provide the funding for mortgages while maintaining affordable housing goals and 30 year mortgages. Encourage new private investment interest but establish strict underwriting rules and regulate to ensure stability.

You would think this is the way free capital markets are supposed to work. Fair, equitable and safe for all.

INSTEAD WHAT THEY ARE TRYING TO DO:

Come up a scheme to get rid of control and stability of housing. Build a new system and hope that it works. Turn over the mortgage business to the risky banks and insurance underwriters under the guise of protecting the taxpayer. Siphon all money earned by the GSEs and send it to Treasury to DISAPPEAR into the black hole for funding something that has nothing to do with housing. Continue to wind down the heart of mortgage liquidity and get rid of the implied guarantee for mortgages. Punish the private investors that provided support in mortgages and continue lawsuit liability that might be ordered to repaid if found liable. Require everyone who wants a home to pay toward a new expensive government mortgage insurance agency with implicit guarantee of loss to the taxpayer when it fails.

Bill Maloni said...

Anon--I wish I had answers to your questions.

The best I can offer in the way of explanation is that Congress has very little idea of how markets truly work sand the role of capital, investors, and the relationship of one to the other.

Most Senators and Congressmen live in a fairy tale world of white hats and black hats and good guys and bad guys.

F&F are in the "black hat and bad guy" categories.

When was the last time you heard any MoC intelligently discuss how the large banks went outside the safe Fannie and Freddie systems--in 2005-2007--and issued more than $2 Trillion of their own flawed mortgage backed securities, which carried inflated ratings, purchased from rating agencies because of unrelated business activity, and then sold by the same originators throughout the world.

That unquestioned activity turned the US real estate softening into a worldwide financial calamity.

Now, with all of the same federal financial regulatory agencies in place Corker-warner and now Johnson-Crapo proposes to give those same TBTF banks federal guarantees on their MBS and hope that shit won't happen, again?

I can't understand that, at all.

Chris Roberts said...

Hi Bill -

Much higher interest rates? 90-200 BP?

Couldn't agree more. In Zandi's think tank, it is 50 BP. Gross said w/o govt. backstop = 300 BP.

Do people remember when the govt. decided to let free-markets deal with student loans a little while back?

People were fearful that rates would effectively DOUBLE. They were like 5,6,7% and they were going to 12%.

That plan was put aside very quickly.

Thanks for your insights... Chris