Fannie Mae’s wolf pack on the hunt
Other than humans, wolves are nature’s most sophisticated hunters, regularly stalking and bringing down much larger game by pooling their talents and using a pack approach to stalk, bewilder, harass, exhaust, and eventually overcome their prey. Key to the wolves’ success is shrewd target selection, they often feint at the caribou, and only if the animal shows weakness do they perk up into the snapping, chasing pack.
For at least two decades, until the OFHEO-provoked SEC revelations a year and a half ago and its more recent blistering report and $400 million fine, Fannie Mae and its fellow duopolist Freddie Mac stood serenely apart from the snapping pack, never threatened, never even seriously challenged, lords of their domain.
Is that the best you got?
As then-COO and current CEO Daniel Mudd wrote in an email that I’ll bet he wishes he had back:
Over the years, Fannie Mae compiled a remarkable track record of achieving its political objectives. As then Chief Operating Officer Daniel Mudd remarked in a memorandum to CEO Franklin Raines in November 2004, “[t]he old political reality was that we always won, we took no prisoners, and we faced little organized political opposition.”
Quotes in green are from OFHEO’s 348-page report
Eternal lobbying was the price of prominence, and it cowed the pack:
Fannie Mae’s lobbyists “did a superb job,” said Wright H. Andrews Jr., a partner at Butera & Andrews, a lobbying firm. “Politicians of both parties were afraid to give proper oversight.”
Not any more, as the wolf pack is gathering, led by aspiring alpha dog OFHEO:
The image of Fannie Mae communicated by Mr. Raines and his inner circle and promoted by the
Pay no attention to the auditor behind the curtain!
When the caribou is weakened, the wolves isolate on it and harass it to exhaustion. That’s happening now as a pack is forming among regulators, litigators, and journalists, all of whom sense the wounded beast.
“I haven’t heard anything, have you heard anything?”
People responsible for accounting violations that helped Fannie executives maximize their bonuses by massaging the company’s results from 1998 through 2004 “will be vigorously pursued,” Christopher Cox, chairman of the SEC, said at a press briefing.
The Wall Street Journal can barely contain its glee:
For years, high-level jobs at Fannie Mae were lucrative prizes for lawyers, bankers and political operatives waiting for their next
Now, that cozy arrangement is coming back to bite some current and former executives of the government-sponsored provider of funding for home mortgage loans.
They start out looking so cute, but don’t restate earnings after
As part of last month’s $400 million settlement of accounting-fraud charges, the company’s regulator has ordered Fannie to examine the records of executives mentioned in a scathing report on Fannie’s accounting misdeeds. The company must decide whether to seek restitution of past compensation from any of them, according to the order from the Office of Federal Housing Enterprise Oversight.
“I want you to give back your excessive compensation.”
As the Journal put it:
For the six years through 2003, the report said, $52 million of the $90 million of compensation for Mr. Raines, then the CEO, was directly tied to meeting targets for earnings per share. “You could argue that none of [the $52 million] was deserved,” Mr. Lockhart said.
Even more than past misdeeds — after all, restitution is measured in Millions and the losses are in Billions — at issue is how strongly the GSEs will be regulated in the future. In other contexts, I have joked that to a bureaucrat, a rule is something they write and someone else follows. It appears Fannie Mae’s management had a similarly regal view:
Then-Federal Reserve Chairman Alan Greenspan and others came to fear that a sudden meltdown at one of the two companies could bring down the financial markets with it — an argument that Johnson and his successor, Franklin D. Raines, fought at every opportunity. They assured investors and policymakers that no such thing could happen because the company was so well managed.
OFHEO is more direct:
Senior management expected to be able to write the rules that applied to Fannie Mae and to thwart efforts to regulate the
OFHEO, constraining by regulation even in advance of statute, is demonstrating there’s a new sheriff in town:
James B. Lockhart III, acting director of the agency that oversees the companies’ financial safety and soundness, told lawmakers that he did not envision a quick end to recently imposed restrictions on the level of Fannie Mae’s mortgage-related investments.
“Frankly, it’s hard to see a total removal of limits for several years,” Lockhart told the House subcommittee on capital markets.
Before settling on its principal target, a hunting pack tests a whole herd.
Let’s see who else we can hunt.
Questions are being raised about Fannie Mae’s former management:
Other prominent people whose names pop up in the Ofheo report include James A. Johnson, a former Fannie CEO who was an adviser to the 2004 presidential campaign of Sen. John Kerry, and Jamie Gorelick, a former Fannie vice chair who was a deputy attorney general under President Clinton and a member of the 9/11 Commission.
Curiously, her current bio omits any mention of her six years at Fannie Mae.
“Her bio said nothing about Fannie Mae.”
“That was the curious incident.”
The claw is reaching ever further backwards into Fannie Mae’s previous management.
When James A. Johnson walked out of his office as chief executive at Fannie Mae for the last time, in December 1998, the longtime Democratic Party operative and investment banker could look back at his nearly decade-long tenure at the helm knowing the company had lived up to his promises of double-digit earnings growth. The value of its assets had also tripled, and its share price had risen sevenfold.
Good numbers kept Wall Street happy. They paid the light bills for more than 50 partnership offices that represented Fannie Mae around the country. And they made top executives multimillionaires. Johnson received $21 million in his last year as chief executive and a consulting contract worth $600,000 a year.
But when good numbers — and the bonuses that came with them — weren’t possible anymore, the executives who came after Johnson allegedly rearranged the math and, even after accounting problems were found, used the company’s political clout to fend off closer regulation.
That was the conclusion of Fannie Mae’s chief regulator, the Office of Federal Housing Enterprise Oversight, in a 340-page report that determined the company’s $10.6 billion accounting scandal was rooted in a corporate culture that dates back 20 years.
How about Fannie Mae’s bankers? They’re in the spotlight too:
You might think there couldn’t be any more bad news about Fannie Mae (FNM ), the mortgage-finance giant accused of manipulating earnings and defrauding investors. But additional disheartening revelations could be on the way as regulators focus on the major Wall Street firms and other advisers that gobbled up Fannie business and allegedly aided in a $10.8 billion accounting fiasco.
Securities & Exchange Commission staff members are looking into deals in which Goldman Sachs Group (GS), among others, allegedly helped Fannie rearrange earnings to maintain the appearance of steady profit growth, according to people familiar with the inquiries. Investigators also are scrutinizing KPMG, which, as Fannie’s outside auditor, approved financial statements since deemed misleading. And the SEC staff is examining deals designed by Lehman Brothers Inc. (LEH) and later executed by KPMG that the Internal Revenue Service has determined improperly deferred taxes.
The list goes on. Referring to one arrangement that could come back to haunt insurer Radian Group Inc., a Fannie official wrote in a Jan. 9, 2002, internal e-mail: “I am terrified of the negative public-relations aspects of a disclosure of a transaction like this.”
Will these white-shoe firms stand by their client?
Or will they run for their own cover? It calls to mind the old joke about the two hunters who suddenly find themselves face to face with an angry bear, whereupon one drops his rifle and starts running. “What are you doing?” cries his companion. “You can’t outrun the bear.”
“I don’t have to outrun the bear. I just have to outrun you.”
During yesterday’s hearing, subcommittee Chairman Richard H. Baker (R-LA) said former Fannie chief executive Franklin D. Raines appears to have committed perjury when he testified about Fannie’s accounting before the panel in 2004. A spokesman for Baker, Michael DiResto, said Baker is considering referring the matter to the Justice Department.
Perjury is such a nasty word.
