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Crackdown on Fannie Mae corruptocrats

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By Michelle Malkin  •  December 19, 2006 09:34 AM

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Franklin Raines: The Ken Lay of Fannie Mae

The corruption at behemoth government boondoggle Fannie Mae–I’ve called it the mother of all financial scandals– deserves as much attention as the Enron debacle, but it won’t get it. Check it out: Clintonite Franklin Raines now faces civil charges, along with two other former executives, of manipulating Fannie Mae’s earnings to jack up their bonuses:

In a complaint with an administrative law judge, the Office of Federal Housing Enterprise Oversight detailed 101 charges from 1998 to 2004 against Raines, former chief financial officer Timothy Howard and former controller Leanne Spencer, who all resigned in 2003 as the Fannie Mae scandal worsened.

OFHEO is seeking $100 million in penalties and $115 million in return of bonuses. The regulator also seeks the return of legal fees, and to bar the former executives from any future business with Fannie Mae.

A major force in the mortgage investment market, Fannie Mae has been engulfed in political controversy and financial scandal for years. Lawmakers and regulators are seeking greater regulatory control of the government-sponsored housing finance giant.

Fannie Mae was run by Harvard University graduate Raines, former budget director in the Clinton administration and one of the first black CEOs of a major corporation.

James Lockhart, OFHEO’s director, said the actions of the former executives “cost the enterprise and shareholders many billions of dollars and damaged the public trust.”

The charges only cover 1998 to 2004. Here’s the notice of charges. Officials say violations may have occurred in the early 1990s. Investigation of other current and former Fannie Mae executives continues. Fannie Mae has already been fined $400 million for alleged accounting manipulation.

Where is the outrage from the Culture of Corruption cops in Washington?

Nancy? Harry? Hillary? Anyone?

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June 2003 Flashback:

Martha Stewart is a too-easy target, an overstuffed pink pinata swinging in the wind, waiting to be thwacked by every last critic of capitalist excess. But the stock-dumping doyenne is no match for the real mother of all brewing financial scandals. That moniker belongs to the twin behemoths Fannie Mae and Freddie Mac.

Who, you say? Unlike Martha, or the three-piece-suited villains of Enron or Tyco or WorldCom, Fannie Mae and Freddie Mac haven’t been plastered all over the tabloids and prime-time TV. That’s because they are faceless, government-sponsored enterprises in a complex, loosely regulated, highly leveraged monopoly business that has engaged in questionable accounting practices and put billions of taxpayer dollars at risk — with plenty of private profiteering for company executives and Washington lobbyists, but almost zero accountability to the public.

As federally chartered “government-sponsored enterprises,” the two institutions have been exempt from normal securities regulations for almost their entire lives. Analysts unable to decipher Fannie Mae and Freddie Mac’s incomprehensible annual and quarterly reports have long suspected book-cooking with regard to their real cash flow. This week, the Wall Street Journal reported that Freddie Mac faces an SEC probe over possible accounting irregularities. Investigators will examine whether Freddie Mac may have deferred some income to smooth out results in future periods. The SEC will also probe the actions of the chief executive and chief financial officer, who were fired on Monday over an accounting review of earning restatements. The news sent stocks south and roiled some foreign markets as well.

Clothed in politically correct fashions (“Catch the dream,” beckons Freddie Mac’s program to boost minority home ownership; a “leader in diversity,” brags a Fannie Mae press release), these public-private hybrids are two dangerous pigs feeding at the federal trough. Congress created Fannie Mae (nickname for the Federal National Mortgage Association) in 1938 to bolster home ownership during the Depression. Three decades later, it was partially privatized, but retained a host of government benefits. In 1970, Congress spawned Freddie Mac (nickname for the Federal Home Mortgage Corp.) to provide a lending competitor to Fannie Mae. Both entities expand the pool of money for home purchasers by snapping up loans that lenders make to homebuyers, and then converting those loans into relatively safe mortgage-backed securities that are attractive to investors.

So, what’s wrong with this picture?

As Fred Smith, president of the Washington, D.C-based Competitive Enterprise Institute, has noted, these financial beasts are a textbook example of “profit-side capitalism and loss-side socialism.” When things go right for Freddie Mac and Fannie Mae, they keep the profits. But when things go wrong, taxpayers — not just private shareholders, managers, and employees — will be on the hook.

Freddie Mac and Fannie Mae each receive $2.25 billion lines of credit with the U.S. Treasury. These special pipelines give the institutions an implied federal guarantee available to no other private sector competitors in the mortgage market. That protection makes them immune to the costs normally associated with riskier and riskier behavior. Moreover, Fannie Mae and Freddie Mac are not required to pay state and local income taxes. In addition, the standard for how much money the government requires them to keep on hand in case homebuyers default on their mortgages is lower for Freddie Mac and Fannie Mae than for fully private banks and thrifts. The two corporations receive an estimated $10 billion a year in hidden taxpayer subsidies.

Political appointees to the companies’ boards pocket millions in stock options to bolster support on Capitol Hill. Clinton-appointed board members at Fannie Mae include Marc Rich lawyer Jack Quinn and Janet Reno’s lieutenant at the Justice Department, Jamie Gorelick. At the helm of Fannie Mae is another Clinton appointee, Franklin Raines, who was paid more than $4 million and had almost $6 million in unexercised stock options in his first year at the helm. Cheerleaders in both major political parties have opposed privatizing Fannie and Freddie.

If Martha Stewart is the face of capitalist excess, Fannie Mae and Freddie Mac are the poster children for government-sponsored gluttony. The potential fall of Freddie Mac or Fannie Mae could rival the savings and loan collapse of the 1980s. Too bad the Martha bashers, blind to the far greater catastrophes of market socialism, won’t pay attention until it’s too late.

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Previous:

The Fannie Mae and Freddie Mac racket
Spanking Fannie Mae
Spankin Fannie Mae, contd.
The mother of all financial scandals

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