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.)

 

http://www.youtube.com/watch?v=O1gCV5gUaLA

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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.

http://www.forbes.com/sites/jeffreydorfman/2014/03/08/obama-administrations-lawlessness-finally-hits-home-with-investors/

And from ValuePlays

http://www.valuewalk.com/2014/03/fairholme-likely-to-win-discovery-in-fannie-mae-case/

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

http://www.oregonlive.com/opinion/index.ssf/2014/03/congress_preparing_to_fumble_f.html

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

http://www.americanbanker.com/bankthink/policymaker-have-priorities-crossed-on-private-capital-for-housing-1066012-1.html?utm_campaign=daily%20briefing-mar%205%202014&utm_medium=email&utm_source=newsletter

Mayra Rodriguez Valladares attacks big bank regulatory defenses against in her American Banker article.

http://www.americanbanker.com/bankthink/lawmakers-global-competitiveness-argument-is-a-red-herring-1066028-1.html?utm_medium=email&utm_campaign=-mar%206%202014&utm_source=newsletter 

Agnes Lovas write in Bloomberg re Crimea intervention.

http://www.bloomberg.com/news/2014-03-04/putin-s-ukrainian-gambit-stings-economy-as-allies-lose-billions.html

 

 

Maloni, 3-9-2014