The Wall Street Journal has several old articles on Fannie Mae.The Journal,to its' credit,warned about the dangers of Fannie for several years.Here's a few quotes from these gems.On February 20, 2002 titled
Fannie Mae Enron?:
We were reading President Bush's budget the other day (we know, get a life), when we came across an unusual mention of our all-time favorite companies -- Fannie Mae and Freddie Mac. What we found is a tale we think taxpayers and investors should want to hear.
It seems that Fan and Fred, two "government-sponsored enterprises" that hold the majority of all home mortgages in the U.S., have been growing their debt at an annual rate of 25%. They now have about $2.6 trillion in debt outstanding, a big number in any case, but really big considering that taxpayers are on the hook for it. The budgeteers also expressed some anxiety about Fan and Fred's increasing dependence on derivatives.
Hmmm. Where have we heard this before? The more we've since looked at Fan and Fred the more they look like poorly run hedge funds: lots of leverage and snarkily hedged risk. The word Enron ring any bells?
Last year, Fan's debt/equity ratio was about 60 to 1, more than five times the average for commercial banks.
and this one from October 4, 2004 also titled
Fannie Mae Enron?:
For years, mortgage giant Fannie Mae has produced smoothly growing earnings. And for years, observers have wondered how Fannie could manage its inherently risky portfolio without a whiff of volatility. Now, thanks to Fannie's regulator, we know the answer. The company was cooking the books. Big time.
We've looked closely at the 211-page report issued by the Office of Federal Housing Enterprise Oversight (Ofheo), and the details are more troubling than even the recent headlines. The magnitude of Fannie's machinations is stunning, and in two key areas in particular they deserve to be better understood. By improperly delaying the recognition of income, it created a cookie jar of reserves. And by improperly classifying certain derivatives, it was able to spread out losses over many years instead of recognizing them immediately.
In the cookie-jar ploy, Fannie set aside an artificially large cash reserve. And -- presto -- in any quarter its managers could reach into that jar to compensate for poor results or add to it to dampen good ones. This ploy, according to Ofheo, gave Fannie "inordinate flexibility" in reporting the amount of income or expenses over reporting periods.
This flexibility also gave Fannie the ability to manipulate earnings to hit -- within pennies -- target numbers for executive bonuses. Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million.
Well, in its wisdom, Fannie decided to recognize only $200 million, deferring the other half. That allowed Fannie's executives -- whose bonus plan is linked to earnings-per-share -- to meet the target for maximum bonus payouts. The target EPS for maximum payout was $3.23 and Fannie reported exactly . . . $3.2309. This bull's-eye was worth $1.932 million to then-CEO James Johnson, $1.19 million to then-CEO-designate Franklin Raines, and $779,625 to then-Vice Chairman Jamie Gorelick.
James Johnson of Walter Mondale fame.Franklin Raines and Jamie Gorelick of the Clinton administration.Who could forget this joke on June 14, 2006 titled
Memo to Fannie:
"What's the difference between Enron and Fannie Mae? Answer: The guys at Enron have been convicted."
We commend The Wall Street Journal for their coverage of Fannie and Freddie through the years.These articles,if you haven't read them,are well worth your time.
