The Dog that did not Bark

Remember the ENRON scandal? It was revealed that Arthur Andersen, the premier accounting firm at the time, had been complicit in understating losses, risk, and even fraud. Sixty billion dollars in shareholder value vaporized as if it never existed.

Lately the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation made the back pages of the news when the Treasury Department took steps to prevent the collapse of both semi-private corporations. Losses run to one hundred billion dollars. The scandal is noteworthy because there is little public outcry, minimal publicity, and a total absence of outrage. Why is that?

First, Treasury Secretary Henry Paulson is a former CEO of Goldman Sachs. Jim Johnson, quietly dropped from Obama's VP vetting process, was chairman of Goldman Sachs' compensation committee, a body that set Paulson's hefty salary. Goldman Sachs has quietly let it be known that they'll be cherry-picking heavily discounted and rock-solid mortgage loans. Goldman Sachs in the last year became the owners of West Virginia closely-held corporation McJunkin and promptly merged the pipe and valve distributor with Redman Supply out of Oklahoma. I look for their impressive black glass castle overlooking the Capitol to be sold or abandoned at any moment.

Paulson noted he had no interest in ferreting out "scapegoats" and unveiled the bail-out. Must be a bi-partisan scandal, eh? Hardly. Such lights as Jamie Gorelick, Rahm Emmanuel, Louis Freeh, Franklin Raines and others have been personally enriched to the tune of millions of dollars. Perennial champions of federal regulation Barney Franks and Sen. Christopher Dodd, chairmen of their respective banking committees, have been mysteriously silent supporters of the bailout - a bailout which, uncharacteristically, has engendered no cries for reform.

Where is the outrage? What are they afraid of? Upsetting the apple cart? Running the cash cow dry?

I hate to resurrect this wildly popular thread but there are a few observations which cry out to be made.

To demonstrate the scope of this scandal, I measured it with ENRON. Initially, it appeared to be six times bigger than ENRON. With the $5 trillion bailout it turns out to be eighty-three times bigger than ENRON. Not a perp walk in sight.

Observations are:

1) The respective CEOs of Fannie Mae and Freddie Mac are being rewarded with bonuses of $15 million each as they head out the door. Think of it: as ENRON was going out of business Kenneth Lay and Jeffrey Skilling are given $15 million golden parachutes. The shareholders get nothing. Pensioners get nothing. Utilities with huge natural gas and electric contracts get nothing. $60 billion of capital has evaporated. The chief executives, though, are rewarded with millions of dollars to mark their abject and total failure. “Captain, we’ve struck an iceberg, the ship is sinking, here is a check for $15 million. Best of luck.” This is corporate welfare on steroids.

2) The structure of the bail-out is a conservatorship which is less than a receivership and less than nationalization. Preferred and common stockholders interests are deferred. This guarantees that those who invested in mortgage loans that were substandard are rewarded for it. It also guarantees by retaining the present not-quite-public and not-quite-private structure that the next bail-out will be larger. And, yes, there will be another bail-out. The sheer scope of this deal very nearly renders us France. We’ve cast aside the free market and taken yet another step into socialism. We’ve further skewed the rewards/punishments with which an investor might be expected to live. When housing markets soar, private investors will reap the rewards. When housing markets fail, taxpayers will clean up the mess.

3) In May, 2006 the Office of Federal Housing Oversight said that: ““By deliberately and intentionally manipulating accounting to hit earnings targets,” the report says, “senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders.” The overstatement of revenues was about $10.6 billion. Fannie Mae’s original mission was to buy mortgage loans and “bundle” them for sale to commercial banks. This allowed for turnover in the mortgage markets. In 1999, Clinton hack, Franklin Raines changed the mission to buying mortgages and holding them – netting a profit off the difference between Fannie Mae’s low loan rate and the higher interest charged to the mortgagees. Raines and his executives misstated earnings to inflate their own bonuses, took home over $60 million among themselves, and stuck stockholders and taxpayers with the bill. Skilling and Lay went to jail for a much smaller scam.

And they wrote it all down
as the progress of man .....................................

http://online.wsj.com/article/SB122091995349512749.html?mod=fpa_editors_picks

I consider this a weak statement. Reform has been mentioned for ten or more years. Curiously, when Jim Leach, an Iowa Congressman tried to introduce reform measures, Fannie Mae unleashed massive advertising campaigns in his district to the effect he was denying mortgage loans to the poor. There is nearly no outrage that these quasi-public corporations have a bigger lobbying budget than GE and make political contributions.

http://www.npr.org/templates/story/story.php?storyId=92540620#92534513

Unlike Enron though Fannie and Freddie's capital will not just disappear. Some of it may but as every defaulted loan is backed by a home that will one day sell, after all the write off's and the housing market hits bottom, a whole bunch of someone's are going to make a whale of a lot of money on all those homes that are now setting empty.

Goldman Sachs has already let it be known that they intend to act as buyers in the coming Fannie Mae fire sale. There will be thousands of good solid and cheap mortgage loans for sale. At this moment, the federal government owns a massive stake in private residences all across the country just to prop up the market.

http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html

Well OC I confess I do not understand what you are getting at.

I suspect you are not just chanting the mantra, "Republicans good, Democrats Bad.", Like several others on here do.

So maybe you can explain better.

Sod,

Can you show me a post in which a Republican chanted said mantra?

I would be willing to plead guilty to "Republicans bad, Democrats really bad."

SBen I was just making an unsuccessful attempt at humor, referring to George Orwell's book Animal Farm ok.

I withdraw the comment, as it is distracting from my main objective of learning more about this so-called bailout.

I am sure OC, Aaron, and perhaps others understand it better than I do.

I had thought the bailout/takeover was probably a good thing.

(although I can't explain why).

It is a good thing, as long as Freddie and Fannie are broken up, privatized, and sold off.

Well Randall can you explain why that would be good.

I had sort of assumed they would add stability and keep interest rates from wild fluctuation.

And keep mortgage lenders from taking advantage of people like the credit card outfits do.

Here's how Aaron understands it S. Other then oversight to keep lenders from taking advantage as credit card companies do, government has NO business in the mortgage business.

In the one area where they should have been involved, oversight, they have failed miserably.

As long as these two semi public agencies remain as the largest source of mortgage loan seed money exist as they are, they will be used to seat former government officials who will loot it and steal it blind. I didn't think I was nearly as partisan as I could have been.

This link:

http://www.npr.org/templates/story/story.php?storyId=92540620#92534513

lists the members of the respective boards. Draw your own conclusions. I'm happy to say that the graft and corruption is bipartisan. I no longer prefer crooks of either party and will aver that stealing will continue in a bipartisan fashion because the bailout included no reform of any kind.

And this is what I find so infuriating. You have to demonstrate, when doing something like this, that you have learned a lesson sufficient to prevent a repeat.

And clearly that has not been done.

In this case the lesson is that you cannot mandate a certain percentage of loans going to underserved areas. That creates the incentive and the pressure to make risky loans.

The government has been in the welfare business for some time. They need to be content with that without putting so many caveats into what makes "fair housing" that way.

To show you another example unrelated to Fannie Mae and Freddie Mac, my realtor when I was looking at houses could not tell me that a neighborhood was to be avoided, although the moment we got there it was obvious that this was the case.