Heat and Light (Part 2, Cont.)

(I broke this week’s blog into two parts, because I had a lot to say about issues raised by the New York Times and the Washington Post in articles written last week.Hopefully you find the overall blog thoughtful and provocative.)




OK, fans, friends and enemies, let’s look very carefully at the Fannie “accounting scandal” charges which were the crux of the NYT and Wash Post news stories.

In an effort to provide more information to market investors and a better analysis of value, the Financial Accounting Standards Board (FASB), in 2003, proposed a controversial rule (FASB 133) and sought comment on the regulation requiring mortgage investors to “mark to market” on a continuous basis, the value of those securities, if they were going to be sold or not.

Broad Opposition to Initial FASB Proposal

Fannie, Freddie and dozens of large financial institutions commented negatively on the FASB plan citing the unrealistic nature of “M2M” securities whose values change continuously throughout the day even within the hour.

When the reg became final—working with its outside accountants—Fannie adopted its corporate M2M plan, which it believed produced all the information that FASB wanted for the investing public. .


The first suggestion—that Fannie had “missed the mark”--was brought by their own regulator, which many observers believe was and still is, the shakiest of federal financial regulatory agencies, the Office of Federal Housing Enterprise Oversight (OFHEO), which now is the Federal Housing Finance Agency (FHFA).

Its senior officials, in the first few years of the last decade, admitted great frustration in trying to control and bend Fannie Mae and Freddie Mac to OFHEO’s will. For years, OFHEO’s largely untrained and inexperienced staff had been battling the GSEs over a variety of business procedural issues.

This very much was the case when Armando Falcon was the Director and his minions produced a report containing accounting charges against the three Fannie officers?

(A Senate report from the HUD Inspector General suggested that OFHEO officials tried to drive down the GSEs stock prices in order to gain control over them.)


At the same time, on a larger battlefield, Fannie’s ongoing political war with the Bush Administration flared hot Fannie Mae Chairman Frank Raines dispatched a strongly worded letter to White House Chief of Staff, Andrew Card, complaining about White House and Administration interference in Fannie’s mortgage business operations.

The Raines missive was not well received downtown and may have been the proverbial “last straw.”

The SEC headed then by Christopher Cox—who earned almost zero credibility for his securities industry regulatory achievements, as we learned by 2008--got into the act, blessed the OFHEO allegation, on the thinnest of evidence, and decreed that Fannie missed the FASB goals. After much sturm and drang and back and forth, the three primary Fannie officials involved eventually resigned and Frank Raines’ successor CEO, Dan Mudd, later agreed to pay a $400 Million fine to the SEC.

Those who consumed the Times and Post articles may say. “Over and done with, federal regulators accused Fannie officials of presiding over accounting errors, the responsible company officials were forced to leave and Fannie paid huge fines.”

Hardly Ended There


The Bush Administration, as history has shown, was as politically devious and cut throat as they come and had no scruples about misusing their political positions to inflict damage on political opponents. The record is filled with dubious extra legal actions taken by Bush officials (Lewis Libby, Alphonso Jackson, Alberto Gonzales, Harriet Miers, Josh Bolten, Paul McNulty, Lurita Doan, Karl Rove, et al), many of whom were charged with criminal acts or forced to leave government because of highly questionable official actions.
I believe the White House schemed to force Frank Raines out of Fannie Mae.

Nobody should be surprised if Bush White House asked a lap dog SEC--to employ a lamely disguised OFHEO assault on Fannie--and punish its perceived political/personal/institutional evil

I believe that the White House—at the urging of the big banks and the Far Right elements of the GOP and maybe just a PO’d Andy Card--gave the SEC a political green light to finally strike down Fannie Mae.

(At this blog’s end, I hope you will find a working pdf link to Dan Fidirer’s November 2010 story, from the Huffington Post, analyzing the Cox SEC’s Fannie decision. Blame me if it doesn't work, since I am major "low tech." If my publishing fears are realized and the link doesn't open to you, I urge anyone who has a "working link" to the Fiderer article to please bring it to my attention directly or through the blog “comments” section.)



The SEC Fine

Dan Mudd—unlike his immediate predecessor--was a moderate Republican. I believe that his motive in approving payment of the SEC fine and his decision to beat Fannie’s “swords into plowshares” was more a reflection of his disagreement over corporate tactics in securing policy wins.

In trying to turn his penchant for non-confrontation with the Bush Admin into a political plus--as he also sought to curry favor with the Bushies in his new role—Mudd naively put his head right on the executioner’s block, when the Administration came for him a few years later.

Proof of Innocence in the “Accounting Pudding?”


Most significant for me—and it should be for other observers seeking fire where all of this phony smoke exists--is the fact the Bush Justice Department had the OFHEO/FHFA report for four years and never acted on the OFHEO suggestions that Fannie Mae officials engaged in fraud or misrepresented financial statements. DOJ never filed charges against anyone at Fannie Mae, current or former officials.

The same applies to the Obama Administration which has had the OFHEO report now for two years.

Of course, the GSE political and structural damage—sought by their opponents—largely was successful just with the charges and the allegations. The GSEs later dalliance acquiring Wall Street subprime loans only gave their critics additional grist and hyperbole.

Yet, two years ago, even FASB trimmed back it’s “M2M” reg because of the problems it was causing financial service companies and the markets. (More than 1000 of which—in the first year of the often confusing FASB 133--had to redo their books.).

To many, the 2008 FASB changes suggested that Fannie’s original position on the FASB rule was the correct one.

Companies & The Federal Government Pay for Legal Expenses

Regarding the press stories which kicked off this blog, virtually every “private” financial services company has internal agreements with their officials which pay for legal fees when their executives have been challenged over their corporate actions. Even government agencies pick up the fees when their top officials are sued when carrying out their government duties. It’s not a unique policy.

Financial settlements with OFHEO, now FHFA, contained gaudy numbers but were in fact largely monetized underwater (worthless) corporate shares, allowing the regulator to save face.

Lastly, no admissions of guilt or wrong doing were offered by Fannie officers

Still in 2011, with all of the “bad guys” gone and lots of new folks, chosen by the Bush and Obama administrations onboard, Fannie Mae keeps fighting these law suits and eschews any legal settlements with these litigants.

It certainly appears to me that the company believes the facts its lawyers have compiled in a quite lengthy process of document discovery and witness depositions, on the both the 2004 accounting case and the broader corporate lawsuits, i.e. there just were no violations.

That’s what Messrs Raines and Howard, as well as Ms. Spencer, believe, which is why they continue to fight and utilize the resources at their disposal.

Why wouldn’t people fight to clear their names, if they believe they are innocent, have been politically victimized, and have the capacity to defend themselves?

In one of the articles, former Senate staffer and now law professor, Richard Carnell—who never supported the GSEs but also never rejected an expensive lunch on Fannie’s tab—somehow argues that the former Fannie officials are not entitled to due process and should not be able to defend themselves in court, with legal assistance paid for by their employers under valid employment contracts.

Rick, you might want to join the House GOP and go over the Constitution, again, and see just what rights people accused of violations have in our great country. I just hope you are not insisting that your law students subscribe to your distorted legal dogma!

Why Does It Matter?

Why should anyone care about any of this? If I am correct—once you get beyond the Wall Street originated subprime purchases*, which crushed investors worldwide, which everyone rightly criticizes and which we all agree can be managed through better regulation—the “case” against Fannie Mae (and Freddie) is a shaky house of cards, skillfully constructed and propagated by their business and conservative political opponents.

Maloni, 2-1-11

*Fannie’s overseer wasn’t the only agency asleep at the subprime switch. In the heyday of private label subprime securities (PLS or non-Fannie/Freddie securities), not one federal financial regulator intervened--with its regulatees--or tried to stop the development and sale of PLS or their exotic "hedges," until after the Wall Street mortgage bonds failed and caused hundreds of billions in losses and countless business failures.


The SB

My Super Bowl comments will come next week, by which time I hope to be in “Seventh Heaven.” ("7", Get it?).

Go Steelers!



Huffington Post: Fannie Mae -