Hedge Funds’ Alpha Led To Boom’s Omega

Hedge Funds’ Alpha Led To Boom’s Omega

By DAVID IGNATIUS | Posted Tuesday, October 28, 2008 4:30 PM PT

The hedge fund industry coined a term several years ago for the idea that special people (i.e., hedge fund managers) could achieve above-average returns without taking commensurate risk. They called this investment nirvana “alpha,” to distinguish it from the “beta” of average market returns available to ordinary investors who tracked, say, the S&P 500.

It was the ultimate elitist investment philosophy. The premise was that alpha managers were more clever than other people, and could therefore outperform the market. They could do the things that normal investors were cautioned against — time the markets’ ups and downs, engage in speculative short selling, borrow heavily to increase their returns.

These smarter-than-average managers offered their services to richer-than-average investors who could afford the hedge funds’ hefty fees.

This idea of special investment opportunities for the very rich created a kind of cult. Institutional Investor in 2003 began publishing Alpha magazine for the hedge fund mavens. In a taunt to the poor clods of the beta world, the magazine compiled an annual survey of what the leading fund managers were making.

The average compensation for the top 25 managers last year was a jaw-dropping $892 million, up from $532 million in 2006. Five managers “earned” (if that’s the right word) more than $1 billion each.

As the bubble economy expanded, the alpha managers became ever more confident of their ability to defy the fundamentals of the beta marketplace. They began speaking of “portable alpha,” which purported to remove market risk entirely from a portfolio by using futures, swaps, options and short selling. They were claiming, in effect, to have discovered the equivalent of a gravity-free world, an eternal banquet of free lunches.

The idea that you could use financial engineering to achieve high returns on capital with low risk became contagious. It wasn’t enough to grow with the underlying economy and prosper along with everyone else.

Banks and other financial institutions began seeking their own versions of alpha through strategies that sought to beat the averages. A favorite method was pooling traditional, plain-vanilla assets, such as mortgage loans, and turning them into tradable securities.

The players wanted their own slices of alpha: Smarter-than-average bankers could make big fees on securitization; smarter-than-average executives at Fannie Mae could harvest big bonuses.

The seduction was the idea that the risk inherent in individual loans — that pesky beta — would somehow drop out of the equation if the pool was big enough and the paper sold widely enough. Bankers began to talk as if market risk was a dial you could calibrate up or down, to fit your desired level of return.

That make-believe world began to crash in August 2007. Suddenly, there was no market for the paper assets that had been created out of pools of mortgages — because in a falling market, nobody knew what they were worth.

All the smarter-than-average people who had been chasing better-than-average returns began to be frightened. And over the past year, that fear became toxic. It sucked the trust and confidence out of markets; it was like trying to breathe on a planet with no oxygen.

And then the panic: That has been the most unattractive part of this story. The greed side of the alpha world was bad enough, with its $100 million homes and private art galleries. But the fear side has been more destructive. What’s driving the severe financial downturn now is the quest for “alpha security” among the richest and most powerful.

Having made their loot, the very rich are desperate to protect it. So “smart money” has been sitting on its cash — shunning any institution that might be contaminated, even a mighty Lehman Bros. — and refusing to lend for longer than 24 hours.

“Not since the beginning of the First World War has our banking system been so close to collapse,” warned Mervyn King, the governor of the Bank of England, in a recent speech. King, who helped devise the plan for recapitalization of banks that has now been embraced globally, is one of the few heroes in this crisis.

It’s not a pretty sight: People in the financial world tell me about friends who are buying safes in which to store their cash at home; about withdrawals of millions of dollars in currency to prepare for the ultimate meltdown. Now the alpha spirit comes back as hoarding, but with the same premise: I’m special. The rest of the world be damned.

© 2008 Washington Post Writers Group

Why the Mortgage Crisis Happened Long but worth it

Why the Mortgage Crisis Happened

By M. Jay Wells

Obama’s economic narrative of the mortgage crisis ignores the facts. He has put free-market capitalism at the root of the current mortgage industry debacle, denying the real history of government interference in that market.

On September 15, with banking giant Lehman Brothers filing for bankruptcy protection, Obama was given the opening to begin weaving his anti-capitalist storyline. And that he did. Artfully blurring the mortgage industry crisis with generalized tax policy, Obama declared,

 

“I certainly don’t fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It’s a philosophy we’ve had for the last eight years, one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else.”

 

The words were carefully chosen.  That day in Colorado marked his return to the teleprompter and a strictly refocused campaign message intent on surreptitiously fusing the mortgage industry woes and free-market capitalism in general. Confident the American people are primed for his socialist brand of “change,” Obama maintained his anti-capitalist theme, “What we have seen in the last few days is nothing less than the final verdict on an economic philosophy that has completely failed.” According to Obama, capitalism has been “rendered . . . a colossal failure.”

 

His chat with a Toledo, Ohio, plumber showcases his socialist, redistributionist ideology:

 

“It’s not that I want to punish your success. I just want to make sure that everybody who is behind you, that they’ve got a chance for success too. . . . I think when you spread the wealth around, it’s good for everybody.”

 

He had already said as much at an April debate where he said his plan was to “look at raising the capital gains tax for purposes of fairness” (after having just admitted that raising the tax would reduce revenues!). For Obama, increased federal revenue be damned, tax increases are nonetheless necessary for redistributionist “fairness.”

 

Contrary to the Obama narrative, however, it is not free-market capitalism at the root of the current mortgage industry crisis, but rather the very socialism Obama hawks. The historical record makes this fact unmistakably clear.
The Growing Government Hand

 


1933-1938
President Franklin D. Roosevelt initiated a series of “New Deal” reform programs designed to affect the mortgage market and homeownership. Fannie Mae, the Federal National Mortgage Association, was established to facilitate liquidity among lending institutions.

 

1968

 

As part of President Johnson’s Great Society reform plan, much of Fannie Mae became a private owned yet government chartered company, a government sponsored enterprise (GSE) providing authority to issue mortgage-backed securities (MBS). Fannie Mae buys home mortgages in order to preserve liquidity in the secondary mortgage market. Though private, it remained backed by the Federal government.

 

1970

 

President Nixon chartered Freddie Mac, the Federal Home Loan Mortgage Corporation, as a GSE to compete with Fannie Mae. Designed to help grow the secondary mortgage market, Freddie Mac purchases mortgages from lending institutions to either be securitized as MBS and sold in the secondary market or held by Freddie Mac. At this time the secondary market for conventional mortgages was small.

 

1977

 

Sen. Proxmire (D-Wisconsin) introduced a “creeping socialism” community reinvestment Senate bill. Opponents argued the bill would allocate credit without regard for merits of loan applications, thereby threatening depository institutions. Proponents countered that it was only to ensure that lenders did not ignore good borrowing prospects in their communities. The bill’s sponsor stressed it would neither force high-risk lending nor substitute the views of regulators or those of banks.

 

President Carter, pressed by grassroots organizations — though opposed by the banking industry, signed into law the Community Reinvestment Act (CRA). In the years following the Act has undergone several revisions.

 

To boost community development laws, CRA was a provision designed to stem bank “redlining,” the practice of drawing a red line around low-income communities and denying lending in these areas. The original intent of CRA was to encourage banks to foster homeownership opportunities in these underserved communities in which the lending institutions are chartered.

 

According to Section 801 of title VIII, “regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs [i.e., credit and deposit services] of the communities in which they are chartered to do business.” Accordingly, “regulated financial institutions have continuing and affirmative obligation” to meet these needs. Moreover, the title required each “appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions.”

 

1980s

 

With CRA came increased oversight of lending institutions to ensure they were giving credit to low- and moderate-income communities. Regulators expressed that CRA was not designed to compel credit allocation, nor did it require risky lending practices. Moreover, ECOA and FHA, not CRA, were in place to address discrimination in lending. But community organization groups like the radical ACORN began efforts to reshape CRA into government-imposition, in accord with what “affirmative obligation” might suggest. They began pressing the semantic open door and stretching the “discrimination” provision to complain about enforcement of the regulations as lending institutions resisted bad lending practices in poor minority communities.

 

August 1989

 

To deal with the savings & loan fallout of the 1980s, Congress enacted the Financial Institutions Reform Recovery and Enforcement Act. In a move with ominous portent, FIRREA mandated public release of lender evaluations and performance ratings, resulting in added pressure on the banking industry. Such public oversight enabled bullying abuses of community organization groups like ACORN to further influence bank lending practices.

 

1990s

 

With the mechanisms in place, the community organizing groups began developing directed strategies to exert more and more pressure on the lending industry in the cloak of complicity with CRA. Community organizer Barack Obama worked closely with ACORN activists. Employing the radical Alinsky intimidation tactics Obama had learned and was teaching — “direct action” — activists crowded bank lobbies, blocked drive-up teller lanes and demonstrated at the homes of bankers to browbeat risky lending in poor and minority communities. Those who resisted were accused of racism to the media and government officials.

 

The agitators could now stall or hijack bank mergers by filing complaints of non-compliance against the institutions. Lawsuits alleging redlining and racism began flooding the court system. With the prospect of expansions and mergers threatened, banks settled cases and, significantly, increasingly made loans they would not have normally made. The net effect, as ACORN litigation increased, was that credit standards lowered.

 

Initially the GSEs resisted purchasing these risky mortgages but eventually the Clinton Administration instructed them to substantially increase the percentage of these mortgages in their portfolios. The government-backed Fannie Mae and Freddie Mac of the Clinton reforms became “a feeding trough,” in the phrase of Peter Ferrara.

 

The poor communities and their exploitive leaders benefited from the capitalization with a surge of homeownership, at least on the surface. Wall Street benefited from increased sales of Fannie Mae and Freddie Mac and guaranteed mortgage-backed securities, as the housing market benefited from new capital channeled from Fannie and Freddie. And the GSE heads profited, with political support in Washington in the form of campaign contributions.

 

In the period 1989-2008, topping the list of recipients of contributions from Fannie Mae and Freddie Mac is the chairman of the Senate Banking Committee, Sen. Dodd (D-Connecticut), who received $165,400. Second on the list is Sen. Obama (D-Illinois), receiving $126,349 with only three years in the Senate. Rep. Frank (D-Massachusetts), received $42,350.

 

February 1990

 

Madeline Talbott, a well-known radical ACORN leader and banking industry agitator, challenged the merger of a Chicago thrift, Bell Federal Savings and Loan Association, who responded that they were being bullied into irresponsible “affirmative-action lending policy.”

 

1991

 

ACORN interfered with a House Banking Committee meeting for two days protesting a move to bring CRA reform.

 

1992

 

Enforcement of CRA was “sporadic,” as the Washington Times notes, until a Federal Reserve Bank of Boston study asserted that there were “substantially higher denial rates for black and Hispanic applicants than for white applicants.” Co-author Lynn Browne was approached by co-author Alicia Munnell to do the study because “community activists were complaining that mortgage loans were not being made in minority communities.”

 

According to the Times, however, “the study had mishandled statistics on minority default rates. When the errors were accounted for, the same study showed no evidence that nonwhite mortgage applicants were being discriminated against.”
Frank Quaratiello, writing in the Boston Herald, cites Stan Liebowitz, “My guess is that they were interested in finding a particular result.” Said Liebowitz, “Richard Syron was head of the Boston Fed at the time. He went on to be the head of Freddie Mac. They were looking for mortgage discrimination and they found it.”
According to Quaratiello, Syron became Freddie Mac CEO and chairman in 2003 and “faced increasing pressure to buy up more and more risky mortgages, some of which the Boston Fed’s guide had, in effect, served to legitimize.” Regarding Syron’s total compensation in 2007 of $18.3 million, Liebowitz reportedly quipped, “Nice reward for presiding over unprofessional research behavior, bankrupting Freddie Mac and crippling our financial system, all in the name of politically correct lending.”

 

September 1992

 

The Chicago Tribune described the ACORN agenda as “affirmative action lending.” And, writes  Kurtz, “ACORN was issuing fact sheets bragging about relaxations of credit standards that it had won on behalf of minorities.”

 

October 1992

 

Congress, enacting the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, allowed legislation to “amend and extend certain laws relating to housing and community development.” The Act created the Office of Federal Housing Enterprise Oversight (OFHEO) within HUD to “ensure that Fannie Mae and Freddie Mac are adequately capitalized and operating safely.” It also “established HUD-imposed housing goals for financing of affordable housing and housing in central cities and other rural and underserved areas.”

 

Rep. Jim Leach (R-Iowa) warned about the impending danger non-regulated GSEs posed. As the Washington Post reports, his concern was that Congress was “hamstringing” the regulator. Complaint was that OFHEO was a “weak regulator.” Leach worried that Fannie Mae and Freddie Mac were changing “from being agencies of the public at large to money machines for the stockholding few.”

 

Rep. Barney Frank (D-Massachusetts) countered, as the Post reports, “the companies served a public purpose. They were in the business of lowering the price of mortgage loans.”

 

September 1993

 

The Chicago Sun-Times reports an initiative led by ACORN’s Talbott with five area lenders “participating in a $55 million national pilot program with affordable-housing group ACORN to make mortgages for low- and moderate-income people with troubled credit histories.” Kurtz notes that the initiative included two of her former targets, Bell Federal Savings and Avondale Federal Savings, who had apparently capitulated under pressure.

 

July 1994

 

Represented by Obama and others, Plaintiffs filed a class action lawsuit alleging that Citibank had “intentionally discriminated against the Plaintiffs on the basis of race with respect to a credit transaction,” calling their action “racial discrimination and discriminatory redlining practices.”

 

November 1994

 

President Clinton addresses homeownership: “I think we all agree that more Americans should own their own homes, for reasons that are economic and tangible and reasons that are emotional and intangible but go to the heart of what it means to harbor, to nourish, to expand the American dream. . . . I am determined to see that you have the opportunity and together we can make that opportunity for the young families of our country. I am committed to a new and unprecedented partnership between industry leaders and community leaders and Government to recommit our Nation to the idea of homeownership and to create more homeowners than ever before.”

 

June 1995

 

Republicans had won control of Congress and planned CRA reforms. The Clinton Administration, however, allied with Rep. Frank, Sen. Kennedy (D-Massachusetts) and Rep. Waters (D-California), did an end-around by directing HUD Secretary Andrew Cuomo to inject GSEs into the subprime mortgage market.

 

As Kurtz notes,”ACORN had come to Congress not only to protect the CRA from GOP reforms but also to expand the reach of quota-based lending to Fannie, Freddie and beyond.” What resulted was the broadening of the “acceptability of risky subprime loans throughout the financial system, thus precipitating our current crisis.”

 

The administration announced the bold new homeownership strategy which included monumental loosening of credit standards and imposition of subprime lending quotas. HUD reported that President Clinton had committed “to increasing the homeownership rate to 67.5 percent by the year 2000.” The plan was “to reduce the financial, information, and systemic barriers to homeownership” which was “amplified by local partnerships at work in over 100 cities.”

 

Kurtz concludes, “Urged on by ACORN, congressional Democrats and the Clinton administration helped push tolerance for high-risk loans through every sector of the banking system — far beyond the sort of banks originally subject to the CRA. So it was the efforts of ACORN and its Democratic allies that first spread the subprime virus from the CRA to Fannie and Freddie and thence to the entire financial system. Soon, Democratic politicians and regulators actually began to take pride in lowered credit standards as a sign of ‘fairness’ — and the contagion spread.”

 

Attorney General Janet Reno, with a number of bank lending discrimination settlements already, sternly announces, “We will tackle lending discrimination wherever it appears.” With the new policy in full force, “No loan is exempt; no bank is immune.” “For those who thumb their nose at us, I promise vigorous enforcement,” reiterated Reno.

 

1997

 

HUD Secretary Cuomo said “GSE presence in the subprime market could be of significant benefit to lower-income families, minorities, and families living in underserved areas . . .”

 

1998

 

By falsifying signatures on Fannie Mae accounting transactions, $200 million in expenses was shifted from 1998 to later periods, thereby triggering $27.1 million in bonuses for top executives. James A. Johnson received $1.932 million; Franklin D. Raines received $1.11 million; Lawrence M. Small received $1.108 million; Jamie S. Gorelick received $779,625; Timothy Howard received $493,750; Robert J. Levin received $493,750.

 

April 1998

 

HUD announced a $2.1 billion settlement with AccuBanc Mortgage Corp. for alleged discrimination against minority loan applicants. The funds would provide poor families with down payments and low interest mortgages. Announcing the Accubank settlement, Secretary Cuomo said, “discrimination isn’t always that obvious. Sometimes more subtle but in many ways more insidious, an institutionalized discrimination that’s hidden behind a smiling face.”

 

Before the camera, Cuomo admitted the mandate amounted to “affirmative action” lending that would result in a “higher default rate.” The institution would “take a greater risk on these mortgages, yes; to give families mortgages who they would not have given otherwise, yes; they would not have qualified but for this affirmative action on the part of the bank, yes. It is by income, and is it also by minorities? Yes. . . . With the 2.1 billion, lending that amount in mortgages which will be a higher risk, and I’m sure there will be a higher default rate on those mortgages than on the rest of the portfolio.”

 

May 1999

 

The LA Times reports that African Americans homeownership is increasing three times as fast as that of whites, with Latino homeowners is growing five times as fast, attributing the growth to breathing “the first real life into enforcement of the Community Reinvestment Act.” This breath of “life” mandated that Fannie Mae and Freddie Mac buy mortgages with deviant down-payments and debt-to-income ratios which allowed lenders to approve mortgages for lower-income families that would have been denied otherwise.

 

By now all pretense had disappeared, lending practices were based upon concerns of discrimination in the banking system regardless the consequences. The administration threatened to veto a bill passed by the Senate which had “shortsightedly voted to retrench” CRA, as the advocative Times put it.

 

Under pressure, Fannie Mae was resisting increased targeting, arguing that the result would be more loan defaults. Barry Zigas, heading Fannie Mae’s low-income efforts, argued, “There is obviously a limit beyond which [we] can’t push [the banks] to produce,” the Times reported.

 

Fall of 1999

 

Treasury Secretary Lawrence Summers warned, “Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly.”

 

September 1999

 

With pressure from the Clinton Administration, Fannie Mae eased credit requirements on loans it would purchase from lenders, making it easier for banks to lend to borrowers unqualified for conventional loans. Raines explained that “there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market,” reported the New York Times.

 

With this action, Fannie Mae put itself at substantial risk in the event of an economic downturn. “From the perspective of many people, including me, this is another thrift industry growing up around us,” warned Peter Wallison. “If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.” The danger was known.

 

September 1999

 

A study by Freddie Mac, confirming earlier Federal Reserve and FDIC studies, contradicts race discrimination arguments for CRA. The study found that African-Americans with annual incomes of $65-$75,000 have on average worse credit records than whites making under $25,000, showing that the difficulty in qualifying was not because of race but because of bad credit records. The Federal Reserve Bank of Dallas accordingly entitled a paper “Red Lining or Red Herring?”

 

2000

 

The National Community Reinvestment Coalition instructed on how to exploit the new CRA regulations, “Timely comments can have a strong influence on a bank’s CRA rating.” NCRC asserted, “To avoid the possibility of a denied or delayed application, lending institutions have an incentive to make formal agreements with community organizations.” That is, the mere threat to intervene in the CRA review process had equipped the ACORN groups for the massive shakedown.

 

Moreover, ACORN had been given a compelling incentive, as CRA allowed the organizations to collect a fee from the banks for their services in marketing the loans. The Senate Banking Committee had estimated that, as a result of CRA, $9.5 billion had gone to pay for services and salaries of the organizers.

 

Winter 2000

 

City Journal warned that the Clinton administration had turned CRA into “a vast extortion scheme against the nation’s banks,” committing $1 trillion for mortgages and development projects, most of it funneled through the community organizers.

 

March 2000

 

Rep. Richard Baker (R-Louisiana) proposed a bill to reform Fannie and Freddie’s oversight in a House Subcommittee on Capital Markets.

 

Rep. Frank (D-Massachusetts) dismissed the idea, saying concerns about the two were “overblown” and that there was “no federal liability there whatsoever.”

 

Treasury Undersecretary Gary Gensler testified in favor of GSE regulation. He argued that the bill would promote private market discipline, increase transparency and preserve market competition, reducing the potential for subsidized competitors to distort financial markets.

 

Fannie Mae spokesmen responded by calling the testimony “inept,” “irresponsible,” and “unprofessional.”

 

Wallison of the American Enterprise Institute testified to the subcommittee that the bill was “a milestone in Congressional efforts to gain control of the Government Sponsored Enterprises.” He added that the “political courage and stamina that was required to introduce this bill and to continue to press it forward cannot be overstated.” He emphasized that the bill was only an “interim step in the necessary process of dismantling the GSEs and eliminating both their threat to the taxpayers and to the private financial sector of our economy.”

 

Wallison explained why Fannie and Freddie “pose a serious problem for both the public and private sectors.” First, they contain an inherent contradiction. “It is a shareholder-owned company, with the fiduciary obligation to maximize profits, and a government-chartered and empowered agency with a public mission. It should be obvious that it cannot achieve both objectives. If it maximizes profits, it will fail to perform its government mission to its full potential. If it performs its government mission fully, it will fail to maximize profits.”

 

He sounded an alarm on a “vicious and dangerous cycle.” “Fannie and Freddie must grow in order to maintain their profitability and hence their high stock prices, but there is no countervailing check on their growth – no effective competition, no required government approvals, and no fear in the financial markets that there is any risk associated with financing this growth. Moreover, their fiduciary obligations to their shareholders require them to exploit their subsidy to the fullest extent possible. These are agencies that are – in the fullest sense of the phrase – out of control.”

 

Congressional Democrats and GSE representatives vigorously attacked any such criticism. “We think that the statements evidence a contempt for the nation’s housing and mortgage markets,” rebuffed Sharon McHale, Freddie Mac spokeswoman. Congressional Democrats and GSE representatives prevailed.

 

June 2000

 

Fred L. Smith Jr., writing  in Investor’s Business Daily, recalls testifying before the House Financial Services Committee that GSE “special privileges create a serious hazard to the market, to taxpayers [and] to the economy.” He warned that these GSEs were “strange organizations, neither private-sector fish nor political-sector fowl” and that “as a result, no one is quite sure how these entities should be evaluated or held accountable.” These new debt portfolios “will certainly increase the likelihood of a Fannie-Freddie default.”

 

Rep. Paul Kanjorski (D-Pennsylvania): “Mr. Smith, that is almost a fallacious argument,” adding that rapid growth of GSE debt holdings was nothing to worry about as it simply reflected “inflation and the growth of population. “Everything, proportionately, is that much larger.”

 

Rep. Marge Roukema (R-New Jersey): “very few banks or S&Ls could, even in this day and age, even now, meet the stress-testing requirements which Fannie and Freddie are required to meet.”

 

Rep. Carolyn Maloney (D-New York) regarding the Treasury Department line of credit: “It is really symbolic, it is obsolete, it has never been used.” “Would you explain why it would be important to repeal something that seems to be of little use?”

 

Smith: “as long as the pipeline is there, it is like it is very expandable. . . . It is only $2 billion today. It could be $200 billion tomorrow.”

 

Because of Democrat obfuscation, Smith’s “tomorrow” arrived in 2008 when Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship.

 

April 2001

 

Fiscal Year 2002 Budget declares that the size of Fannie Mae and Freddie Mac is “a potential problem,” because “financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity,” says a White House release.

 

July 2001

 

Subcommittee hearing on a bill proposed by Rep. Baker to transfer supervisory and regulatory authority over Fannie Mae and Freddie Mac to the Board of Governors of the Federal Reserve System and abolish the OFHEO.

 

Rep. Paul Kanjorski (D-Pennsylvania) responded: “This bill would dramatically restructure the current regulatory system for Fannie Mae and Freddie Mac. In my opinion, it also represents a solution in search of a problem. Nearly a decade ago, Congress created a rational, reasonable, and responsive system for supervising GSE activities, and that system with two regulators is operating increasingly effectively. H.R. 1409 would unfortunately interrupt this continual progress.”

 

March 2002

 

Business Week interview with Fannie Mae Vice-Chairman Jamie Gorelick about the prospects for the coming year:

 

Gorelick: “we are expecting a very, very strong 2002.”

 

Gorelick: “We believe we are managed safely. . . . Fannie Mae is among the handful of top-quality institutions. . . . . And we have consistently exceeded every standard that the examiners have set for us.”

 

May 2002

 

In an OMB Prompt Letter to OFHEO, the President calls for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac.

 

February 2003

 

OFHEO reports that “although investors perceive an implicit Federal guarantee of [GSE] obligations . . . the government has provided no explicit legal backing for them,” warning that unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market, according to a White House release.

 

2003

 

Rep. Richard Baker (R-Louisiana), chairman of the House Financial Services subcommittee with GSE oversight over Fannie Mae and Freddie Mac, was informed by OFHEO “on the salaries paid to executives at both companies,” according to the Washington Post. Reportedly, “Fannie Mae threatened to sue Baker if he released it, he recalled. Fearing the expense of a court battle, he kept the data secret for a year.” “The political arrogance exhibited in their heyday, there has never been before or since a private entity that exerted that kind of political power,” he said.

 

June 2003

 

Freddie Mac reported it had understated its profits by $6.9 billion. OFHEO director Armando Falcon Jr. requested that the White House audit Fannie Mae.

 

July 2003

 

Sens. Chuck Hagel (R-Nebraska), Elizabeth Dole (R-North Carolina) and John Sununu (R-New Hampshire) introduced legislation to address Regulation of Fannie Mae and Freddie Mac. The bill was blocked by Democrats.

 

September 2003

 

In an interview with Ron Insana for CNN Money, Rep. Baker warned, “I have concerns that if appropriate resources aren’t allocated for internal risk management, the consequences will be far more severe than just a real estate slowdown. The losses would fall quickly through the capital these companies have and down to shareholders and taxpayers. These companies have some of the lowest capital margins of any financial institution in the nation, yet, at the same time, they are two of the largest. The concern is that if something doesn’t work out the way they predict, the American taxpayer could be called on to pay off the debt in some sort of bailout.”

 

The New York Times reports that the Administration recommended “the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago,” calling for new supervision of Fannie Mae and Freddie Mac by the Treasury Department. Reportedly, Congressional Democrats “fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.”

 

Treasury Secretary John Snow testifies  that Congress enact “legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises” and set prudent and appropriate minimum capital adequacy requirements, says a White House release.

 

Rep. Barney Frank (D-Massachusetts): “I do not think we are facing any kind of a crisis. That is, in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. . . . I do not think at this point there is a problem with a threat to the Treasury. . . . I believe that we, as the Federal Government, have probably done too little rather than too much to push them to meet the goals of affordable housing and to set reasonable goals.

 

Rep. Barney Frank (D-Massachusetts): “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis. . . . The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

 

Rep. Melvin Watt (D-North Carolina): “I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing.”

 

October 2003

 

Fannie Mae discloses $1.2 billion accounting error.

 

November 2003

 

Council of the Economic Advisers Chairman Greg Mankiw warned, “The enormous size of the mortgage-backed securities market means that any problems at the GSEs matter for the financial system as a whole. This risk is a systemic issue also because the debt obligations of the housing GSEs are widely held by other financial institutions. The importance of GSE debt in the portfolios of other financial entities means that even a small mistake in GSE risk management could have ripple effects throughout the financial system,” from a White House release.

 

Mankiw explains that any “legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk.” To reduce the potential for systemic instability, the regulator would have “broad authority to set both risk-based and minimum capital standards” and “receivership powers necessary to wind down the affairs of a troubled GSE,” says a White House release.

 

February 2004

 

Fiscal Year 2005 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital, and called for creation of a new, world-class regulator: “The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore . . . should be replaced with a new strengthened regulator,” reports a White House release.

 

Mankiw cautions Congress to “not take [the financial market's] strength for granted.” Again, the call from the Administration was to reduce this risk by “ensuring that the housing GSEs are overseen by an effective regulator,” says a White House release.

 

June 2004

 

Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed by the GSEs and called for reform, saying “We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System,” the White House reports.

 

September 2004

 

OFHEO reported that Fannie Mae and CEO Raines had manipulated its accounting to overstate its profits. Congress and the Bush administration sought strong new regulation and authority to put the GSEs under conservatorship if necessary. As the Washington Post reports, Fannie Mae and Freddie Mac responded by orchestrating a major campaign “by traditional allies including real estate agents, home builders and mortgage lenders. Fannie Mae ran radio and television ads ahead of a key Senate committee meeting, depicting a Latino couple who fretted that if the bill passed, mortgage rates would go up.” Again, GSE pressure prevailed.

 

October 2004

 

Rep. Baker again warned about the coming crisis in the Wall Street Journal: “Then there’s the lesson of a company, Frankenstein-like, seemingly grown so powerful that it can intimidate and arrogantly flout all accountability to the very government that created it.”

 

Baker adds, “Although their bonds bear the disclaimer ‘not backed by the full faith and credit of the U.S. government,’ the market does not believe it and looks right past the companies’ risk strategies to the taxpayers’ pockets.”

 

In a subcommittee testimony, Democrats vehemently reject regulation of Fannie Mae in the face of dire warning of a Fannie Mae oversight report. A few of them, Black Caucus members in particular, are very angry at the OFHEO Director as they attempt to defend Fannie Mae and protect their CRA extortion racket.

 

Chairman Baker (R-Louisiana): “It is indeed a very troubling report, but it is a report of extraordinary importance not only to those who wish to own a home, but as to the taxpayers of this country who would pay the cost of the clean up of an enterprise failure. . . . The analysis makes clear that more resources must be brought to bear to ensure the highest standards of conduct are not only required, but more importantly, they are actually met.”

 

Rep. Maxine Waters (D-California): “Through nearly a dozen hearings where, frankly, we were trying to fix something that wasn’t broke.”

 

Rep. Maxine Waters (D-California): “Mr. Chairman, we do not have a crisis at Freddie Mac, and particularly at Fannie Mae, under the outstanding leadership of Mr. Frank Raines.”

 

Rep. Gregory Meeks (D-New York): “And as well as the fact that I’m just pissed off at OFHEO, because if it wasn’t for you I don’t think that we’d be here in the first place, and now the problem that we have and that we’re faced with is: maybe some individuals who wanted to do away with GSEs in the first place, you’ve given them an excuse to try to have this forum so that we can talk about it and maybe change the, uh, the direction and the mission of what the GSEs had, which they’ve done a tremendous job. There’s been nothing that was indicated that’s wrong, you know, with uh Fannie Mae. Freddie Mac has come up on its own. And the question that then presents is the competence that, that, that, that your agency has, uh, with reference to, uh, uh, deciding and regulating these GSEs. Uh, and so, uh, I wish I could sit here and say that I’m not upset with you, but I am very upset because, you know, what you do is give, you know, maybe giving any reason to, as Mr. Gonzales said, to give someone a heart surgery when they really don’t need it.”

 

Rep. Ed Royce (R-California): “In addition to our important oversight role in this committee, I hope that we will move swiftly to create a new regulatory structure for Fannie Mae, for Freddie Mac, and the federal home loan banks.”

 

Rep. Lacy Clay (D-Missouri): “This hearing is about the political lynching of Franklin Raines.”

 

Rep. Ed Royce (R-California): “There is a very simple solution. Congress must create a new regulator with powers at least equal to those of other financial regulators, such as the OCC or Federal Reserve.”

 

Rep. Gregory Meeks (D-New York): “What would make you, why should I have confidence? Why should anyone have confidence, and uh, in, in you as a regulator at this point?”

 

Armando Falcon, OFHEO Director: “Sir, Congressman, OFHEO did not improperly apply accounting rules. Freddie Mac did. OFHEO did not fail to manage earnings properly. Freddie Mac did. So this isn’t about the agency engaging in improper conduct. It’s about Freddie Mac.”

 

Rep. Christopher Shays (R-Connecticut): “And we passed Sarbanes-Oxley, which was a very tough response to that, and then I realized that Fannie Mae and Freddie Mac wouldn’t even come under it. They weren’t under the ‘34 act, they weren’t under the ‘33 act, they play by their own rules, and I and I’m tempted to ask how many people in this room are on the payroll of Fannie Mae, because what they do is they basically hire every lobbyist they can possibly hire. They hire some people to lobby and they hire some people not to lobby so that the opposition can’t hire them.”

 

Rep. Artur Davis (D-Alabama): “So the concern that I have is you’re making very specific, what you have correctly acknowledged, broad and categorical judgments about the management of this institution, about the willfulness of practices that may or may not be in controversy. You’ve imputed various motives to the people running the organization. You went to the board and put a 48-hour ultimatum on them without having any specific regulatory authority to put that kind of ultimatum on ‘em. Uh, that sounds like some kind of an invisible line has been crossed.”

 

Rep. Christopher Shays (R-Connecticut): “Fannie Mae has manipulated, in my judgment, OFHEO for years. And for OFHEO to finally come out with a report as strong as it is, tells me that’s got to be the minimum not the maximum.”

 

Rep. Barney Frank (D-Massachusetts): “Uh, I, this, you, you, you seem to me saying, ‘Well, these are in areas which could raise safety and soundness problems.’ I don’t see anything in your report that raises safety and soundness problems.”

 

Rep. Maxine Waters (D-California): “Under the outstanding leadership of Mr. Frank Raines, everything in the 1992 Act has worked just fine. In fact, the GSEs have exceeded their housing goals. What we need to do today is to focus on the regulator, and this must be done in a manner so as not to impede their affordable housing mission, a mission that has seen innovation flourish from desktop underwriting to 100% loans.”

 

Rep. Lacy Clay (D-Missouri): “I find this to be inconsistent and a and a rush to judgment. I get the feeling that the markets are not worried about the safety and soundness of Fannie Mae as OFHEO says that it is, but of course the markets are not political.”

 

Rep. Barney Frank (D-Massachusetts): “But I have seen nothing in here that suggests that the safety and soundness are at issue, and I think it serves us badly to raise safety and soundness as kind of a general shibboleth when it does not seem to me to be an issue.”

 

Rep. Don Manzullo (R-Illinois): “Mr. Raines, 1.1 million bonus and a $526,000 salary. Jamie Gorelick, $779,000 bonus on a salary of 567,000. This is, what you state on page eleven is nothing less than staggering.”

 

Rep. Don Manzullo (R-Illinois): “The 1998 earnings per share number turned out to be $3.23 and 9 mills, a result that Fannie Mae met the EPS maximum payout goal right down to the penny.”

 

Rep. Don Manzullo (R-Illinois): “Fannie Mae understood the rules and simply chose not to follow them that if Fannie Mae had followed the practices, there wouldn’t have been a bonus that year.”

 

Rep. Christopher Shays (R-Connecticut): “And you have about 3% of your portfolio set aside. If a bank gets below 4%, they are in deep trouble. So I just want you to explain to me why I shouldn’t be satisfied with 3%?”

 

Franklin Raines, Fannie Mae CEO: “Because banks don’t, there aren’t any banks who only have multifamily and single-family loans.”

 

Franklin Raines, Fannie Mae CEO: “These assets are so riskless that their capital for holding them should be under 2%.”

 

January 2005-July 2006

 

Sen. Chuck Hagel (R-Nebraska), co-sponsored by Sens. Sununu and Dole and later Sen. McCain, re-introduced legislation to address GSE regulation.

 

“The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006,” reports the Wall Street Journal.

 

Greenspan testified that the size of GSE portfolios “poses a risk to the global financial system. It would be difficult, if not impossible, to bail out the lenders [GSEs] . . . should one get into financial trouble.” He added, “If we fail to strengthen GSE regulation, we increase the possibility of insolvency and crisis . . . We put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for homeownership.”

 

Greenspan warned that if the GSEs “continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road . . . We are placing the total financial system of the future at a substantial risk.”

 

Bloomberg writes, “If that bill had become law, then the world today would be different. . . . But the bill didn’t become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn’t even get the Senate to vote on the matter. That such a reckless political stand could have been taken by the Democrats was obscene even then.”

 

April 2005

 

Treasury Secretary John Snow again calls for GSE reform, “Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America. . . . Half-measures will only exacerbate the risks to our financial system,” from a White House release.

 

May 2005

 

At AEI Online, Wallison warned that “allowing Fannie and Freddie to continue on their present course is simply to create risks for the taxpayers, and to the economy generally, in order to improve the profits of their shareholders and the compensation of their managements. It is a classic case of socializing the risk while privatizing the profit.”

 

January 2006

 

Chairman Greenspan, in a letter to Sens. Sununu, Hagel and Dole, warned that the GSE practice of buying their own MBS “creates substantial systemic risk while yielding negligible additional benefits for homeowners, renters, or mortgage originators.” He stated, “. . . the GSEs and their government regulator need specific and unambiguous Congressional guidance about the intended purpose and functions of Fannie’s and Freddie’s investment portfolios.”

 

March 2006

 

Sens. Sununu and Hagel introduced an amendment to a Lobbying Reform Bill directing GAO to study GSE lobbying and requiring HUD to audit the GSEs annually.

 

May 2006

 

After years of Democrats blocking the legislation, Sens. Hagel, Sununu, Dole and McCain write a letter to Majority Leader William Frist and Chairman Richard Shelby expressing demanding that GSE regulatory reform be “enacted this year” to avoid “the enormous risk that Fannie Mae and Freddie Mac pose to the Housing market, the overall financial system, and the economy as a whole.”

 

May 2006

 

Sen. McCain (R-Arizona) addressed the Senate, “Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were ‘illusions deliberately and systematically created’ by the company’s senior management. . . . Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. . . . OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.”

 

McCain stressed, “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. I urge my colleagues to support swift action on this GSE reform legislation.”

 

April 2007

 

Sens. Sununu, Hagel, Dole, and Mel Martinez (R-Florida) re-introduced legislation to improve GSE oversight.

 

April 2007

 

In “A Nightmare Grows Darker,” the New York Times writes that the “democratization of credit” is “turning the American dream of homeownership into a nightmare for many borrowers.” The “newfangled mortgage loans” called “affordability loans” “represent 60 percent of foreclosures.”

 

September 2007

 

President Bush: “These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I’ve called on Congress to pass legislation that strengthens independent regulation of the GSEs . . . the United States Senate needs to pass this legislation soon.”

 

2007-2008

 

The housing bubble began to burst, bad mortgages began to default, and finally the Fannie Mae and Freddie Mac portfolios were revealed to be what they were, in collapse. And the testimony is evident as to why. As Wallison noted, “Fannie and Freddie were, I would say, the poster children for corporate welfare.”

 

September 2008

 

Rep. Arthur Davis, whose testimony is found above in October 2004, now admits Democrats were in error: “Like a lot of my Democratic colleagues I was too slow to appreciate the recklessness of Fannie and Freddie. I defended their efforts to encourage affordable homeownership when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit when it comes to Fannie and Freddie, we were wrong.”

 

Today 2008

 

The narrative is of another socialist experiment failed, this time a massive federal effort, imperiling the whole US banking industry. Facing this economic disaster, will an informed American people put their trust Obama’s socialist ideology to bring remedy? To do so is to trust in an acetylene torch to put out the fire.

Strange Economic News

Strange Economic News

Randall Hoven
Every breaking story about the economy is just chock full of bad news.  Or should I say bad speculations?  When it comes to real data, the bad news would rather play hide and seek.

The last quarter we have real data for was the second quarter — the one that ended in June.  And GDP growth then was 2.8%.  In fact, it was positive for the first two quarters this year (January through June), and the only two quarters we have real data on so far.  That, my friend, is not a recession — yet.

 

And the latest unemployment report?  Unchanged in September .  At 6.1%, not great, but it could be worse and at least it didn’t go up.  Also, oil prices are falling, almost like a bubble popping.

 

And now what do we hear?  The latest leading economic indicators went up when they were expected to go down.  The AP reported that the Conference Board’s monthly forecast of future economic activity rose 0.3 percent, a better reading than the 0.2 percent drop expected by Wall Street economists surveyed by Thomson/IF.

 

It sure seems like every time a stock index goes up it is attributed to something the government did — bail somebody out, buy some private assets, ease some rate, etc.  But every time it goes down it is attributed to something in the real economy — the unemployment report, for example.

 

But funny thing, after the big $850 billion bailout was signed into law, the S&P 500 index fell every single day for five days straight, for a cumulative loss of 18% in just one week.  But news reports didn’t blame it on the bailout.  The losses were attributed to this or that piece of economic data, like unemployment holding steady.  Huh?  Talk about an elephant in the room.

 

On this Monday, the market was up 4.8% in one day.  The reasons given were the prospect of another government stimulus package, that the bailout was reviving credit markets, or that the Federal Reserve was fixing to do some more good stuff.

 

But something else happened on Monday: the latest economic indicators were released, showing positive and better than expected numbers.

 

I’m beginning to suspect something:  there ain’t no damn recession.

 

I could be wrong, of course. But now, after the government has signed onto $1.8 trillion worth of bailouts, announces some new government goodie almost every day, and all but ushered Barack Obama into the White House, it’s no longer the same ball game.

 

If I didn’t know better, I’d say we just handed a trillion bucks of fun-money to Hank Paulson and his successor for no good reason.

Chuck Schumer has a lot of explaining to do

Chuck Schumer has a lot of explaining to do

Thomas Lifson
Susan Schmidt of the Wall Street Journal has discovered a disconcerting coincidence: Senator Chuck Schumer took a highly unusual step of publicly criticizing a bank, sparking a run on it, just as big Democrat hedge fund donors were examining assets of the bank in hopes of buying them on the cheap should the bank fail.

Schumer of course denies any impropriety. But the odor from this is very, very bad. If a Republican had done something like this, the headlines and network news features would be screaming for his head.

 

Read the excellent article here. A few samples:

 

Sen. Schumer’s office said recently he didn’t know anything about Oaktree’s possible interest in IndyMac until after the bank failed. Oaktree Chairman Howard Marks said he never talked to the senator about IndyMac. [....]

 

The group of investors led by Oaktree are big political contributors, predominantly to Democrats. They have donated more than $700,000 to Senate Democrats and the Democratic Senatorial Campaign Committee during the four years that Sen. Schumer has chaired the campaign committee.

 

Oaktree’s Mr. Marks gave the Democrats’ Senate Campaign Committee $20,000 in late March. Executives of his firm and three other equity firms that considered investing in IndyMac along with Oaktree — Thomas H. Lee Partners, Ares Capital Management LLC and Fortress Investment Group LLC — have been generous donors to the DSCC under Sen. Schumer’s chairmanship, as have many Wall Street financial-services firms.

 

Mr. Marks said he is a longtime Democratic donor and has gotten fund-raising calls from Sen. Schumer. But, he said, “I know him socially. I’ve never talked business with him.” [....]

 

We were interested in taking a look,” said Mr. Marks. His firm has raised $11 billion this year to invest in distressed assets. “We’re bargain hunters. And we have a long history in distress,” he said.

 

The investors knew after a few days of due diligence in mid-June that they weren’t interested in buying the bank, said Mr. Marks. He read from a June 22 email from Oak Tree managing director Skarden Baker, who was assessing IndyMac’s business. “I am taking the view of doing enough here to jump in if it goes to receivership,” wrote Mr. Baker.

 

Four days after the email was sent, Sen. Schumer released publicly letters he sent to bank regulators and to the Federal Home Loan Bank of San Francisco. “I am concerned that IndyMac’s financial deterioration poses significant risks to both taxpayers and borrowers,” the senator wrote, warning that “the bank could face a failure if prescriptive measures are not taken quickly.”

 

Hat tip: Ed Lasky

Monkeys

Once upon a time a man appeared in a village and announced to the villagers that he would buy monkeys for $10 each.

The villagers, seeing that there were many monkeys around, went out to the forest and started catching them.

The man bought thousands at $10 and, as supply started to diminish, the villagers stopped their effort. He next announced that he would now buy monkeys at $20 each. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so scarce it was an effort to even find a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50 each! However, since he had to go to the city on some business, his assistant would buy on his behalf.  In the absence of the man, the assistant told the villagers:
“Look at all these monkeys in the big cage that the man has already collected.

I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.”

The villagers rounded up all their savings and bought all the monkeys for 700 billion dollars.

They never saw the man or his assistant again, only lots and lots of monkeys!

Now you have a better understanding of how the


WALL STREET BAILOUT


PLAN WILL WORK !!!!


Here is a quick look into 3 former Fannie Mae executives who have Brought down Wall Street.

Here is a quick look into 3 former Fannie Mae executives who have
Brought down Wall Street.

Franklin Raines was a Chairman and Chief Executive Officer at Fannie
Mae. Raines was forced to retire from his position with Fannie Mae
When auditing discovered severe irregularities in Fannie Mae’s
Accounting activities. At the time of his departure The Wall Street
Journal noted, ” Raines, who long defended the company’s accounting
Despite mounting evidence that it wasn’t proper, issued a statement late
Tuesday conceding that “mistakes were made” and saying he would assume
Responsibility as he had earlier promised. News reports indicate the
Company was under growing pressure from regulators to shake up its
Management in the wake of findings that the company’s books ran afoul of
Generally accepted accounting principles for four years.” Fannie Mae had
To reduce its surplus by $9 billion.

Raines left with a “golden parachute valued at $240 Million in benefits.
The Government filed suit against Raines when the depth of the
Accounting scandal became clear.
http://housingdoom.com/2006/12/18/fannie-charges/ . The Government
Noted, “The 101 charges reveal how the individuals improperly
Manipulated earnings to maximize their bonuses, while knowingly
Neglecting accounting systems and internal controls, misapplying over
Twenty accounting principles and misleading the regulator and the
Public. The Notice explains how they submitted six years of misleading
And inaccurate accounting statements and inaccurate capital reports that
Enabled them to grow Fannie Mae in an unsafe and unsound manner.” These
Ch arges were made in 2006. The Court ordered Raines to return $50
Million Dollars he received in bonuses based on the miss-stated Fannie
Mae profits.

Tim Howard – Was the Chief Financial Officer of Fannie Mae. Howard “was
A strong internal proponent of using accounting strategies that would
Ensure a “stable pattern of earnings” at Fannie. In everyday English -
He was cooking the books . The Government Investigation determined
That, “Chief Financial Officer, Tim Howard, failed to provide adequate
Oversight to key control and reporting funct ions within Fannie Mae,”

On June 16, 2006, Rep. Richard Baker, R-La., asked the Justice
Department to investigate his allegations that two former Fannie Mae
Executives lied to Congress in October 2004 when they denied
Manipulating the mortgage-finance giant’s income statement to achieve
Management pay bonuses. Investigations by federal regulators and the
company’s board of directors is nce concluded that management did
Manipulate 1998 earnings to trigger bonuses. Raines and Howard resigned
Under pressure in late 2004.

Howard’s Golden Parachute was estimated at $20 Million!

Jim Johnson – A former executive at Lehman Brothers and who was later
Forced from his position as Fannie Mae CEO. A look at the Office of
Federal Housing Enterprise Oversight’s May 2006 report
On mismanagement
And corruption inside Fannie Mae, and you’ll see some interesting things
About Johnson. Investigators found that Fannie Mae had hidden a
Substantial amount of Johnson’s 1998 compensation fr om the public,
Reporting that it was between $6 million and $7 million when it fact it
Was $21 million.” Johnson is currently under investigation for taking
Illegal loans from Countrywide while serving as CEO of Fannie Mae.

Johnson’s Golden Parachute was estimated at $28 Million.

WHERE ARE THEY NOW?

FRANKLIN RAINES? Raines works for the Obama Campaign as Chief Economic
Advisor

TIM HOWARD? Howard is also a Chief Economic Advisor to Obama

JIM JOHNSON? Johnson hired as a Senior Obama Finance Advisor and was
Selected to run Obama’s Vice Presidential Search Committee

Bailout Saga Proves that Elites Don’t Care What We Think

Bailout Saga Proves that Elites Don’t Care What We Think

October 4, 2008 – by Tom Blumer

In mid-September, when it became clear to Hank Paulson, Ben Bernanke, and George Bush that extraordinary measures were needed to address the mess that had built up in the financial markets during the past decade or so, their first instincts should have been to say:

  • “We need to have a complete plan to deal with this.”
  • “We need to make a case to Congress and the American people that our plan will work.”

They did neither of these things; nor did they even seem to consider whether what they wanted was even constitutional.

Instead, they in essence demanded that Congress and the American people give them a blank check, saying, “Do this, or else.” Last Sunday, I [1] called it blackmail. I stand by that.

Of course, a large plurality of Congressmen and Senators, along with a majority of the American people, were repulsed. The wonder is that everyone wasn’t.

Among the repulsed were well over 150 economists from across the political spectrum, including three Nobel laureates, [2] who signed a letter of protest (also [3] carried here; bolds are mine):

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayersÕ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America’s dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

The monstrosity that became law yesterday (PDF-formatted first 250 pages [4] here) does not begin to adequately address the group’s three key concerns.

Fairness? Let’s talk about fairness to taxpayers and future generations. What assurances do we have, if any, that monies recovered when purchased assets are resold will go towards reducing the just-increased national debt? I fear it will instead be diverted to Uncle Sam’s day-to-day operations, enabling Congress and future presidents to further cover up an already over-the-top annual structural deficit. If you don’t think this can happen, just remember how Social Security has been [5] stripped bare for four decades.

Ambiguity? You can’t get much more ambiguous than what a Treasury official [6] told Forbes Magazine on September 23 (bolds are mine):

….. some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

Again: Blackmail.

Oh, and do you think that even the made-up $700 billion now enshrined into law is any kind of real limit? Think again.

The supposedly limiting language in Section 115 of the bill has to do with “the authority of the Secretary to purchase troubled assets” to certain amounts “outstanding at any one time.” Treasury’s authority starts at $250 billion; Congress can increase that authorization to as much as $700 billion.

With this language, under its “Troubled Assets Relief Program” (TARP) authorization, Treasury can initially purchase $250 billion in “troubled” loans. If it auctions off $50 billion of that amount, there will then be only $200 billion “outstanding.” Treasury can then go out and purchase another $50 billion. This can go on and on and on.

As far as I can tell, there is nothing that would prevent Treasury from continually buying, reselling, and replacing loans, thereby busting the supposed “limits” by hundreds of billions, if not trillions.

Given the billions that financial firms [7] appear poised to make in managing the largely outsourced program, Wall Street has the ability, and every incentive, to turn TARP into a fee-generating perpetual-motion machine while it is in place (theoretically, until the end of 2009).

Long-term effects? Heck, we’re already seeing proof of the long-term effects in the short-term. California’s Arnold Schwarzenegger, whose state has a welfare dependency rate that [8] is 2-1/2 times that of the rest of the nation, is making noises about getting [9] his own $7 billion bailout. The auto industry [10] is getting what was unthinkable even two years ago: $25 billion in loan guarantees, and with barely a whimper of objection.

[11] As I wrote yesterday:

….. what possible response, other than “okey-dokey,” is there to anyone who says, “Well, if you could handle $700 billion for the financial-services industry, how can you not provide $_____ (fill in the blank) for _________ (fill in the blank)?”

When the problem became clear, a mature Washington political culture would have done something close to the following:

  • Bush, Bernanke, and Paulson would have consulted with some of the aforementioned economists to craft a plan that would meet the three concerns they were forced to raise after the fact.
  • Bush would have called a joint session of the Senate and House to give Bernanke, Paulson and economists the chance to make their case to Congress and the nation.
  • Bush would have insisted that any changes to what they proposed would have to be germane to the plan (i.e., no pork, and nothing else extraneous).

Instead, what was three pages turned into 451. What was a bill with a made-up $700 billion price tag became a pork-laden bill with a made-up $850 billion price tag chock full of unrelated and dangerous provisions too numerous to mention here.

The just-enacted legislation will likely haunt the economy, and the nation, for years.

That we have a nearly incorrigible and immature Washington political culture has never been more clear.


Article printed from Pajamas Media: http://pajamasmedia.com

Why and How the financial crisis happened

http://www.youtube.com/user/TheMouthPeace

This is based upon “FACTS AND EVENTS DOCUMENTED WITH GOOGLE SITES
REFERENCING ACTUAL DOCUMENTS VERIFYING  EACH AND EVERY TRANSACTION”, so
don’t fail to view its ten (10) minutes long video.  You won’t be sorry.
After you view it……pass it along to everyone you know.

Dear Congress: Put the gun down now

Senate package would bail out major foreign investors, including China

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