If there is one element of the 2008 financial meltdown that likely unites Americans of every political persuasion it is the idea that some of the worst actors involved remain unpunished for their malfeasance. Moreover these malefactors not only remain unpunished, but have done quite nicely for themselves despite the economic swoon that has battered millions of Americans. Two former Fannie Mae executives, James Johnson and Franklin Raines, are textbook examples of the odious crony capitalist/government nexus which turns a blind eye to greed, incompetence, and arguably criminal behavior for the well-connected.
We begin with James Johnson, a politically astute and well-connected Democratic supporter who was appointed chief executive of Fannie Mae in 1991. As best revealed in the book Reckless Endangerment, Johnson decided his mission was to expand home ownership--and enrich himself and others in the process. As the book explains, for years Fannie Mae's compensation structure was "a conservative one with executive pay linked to a wide range of performance measures," including "how well the company managed its cost each year and what its return on assets was, a calculation of how much the company made on the loans it held on its books." Johnson's strategy? Tying compensation "almost solely to earnings growth." As a result, between 1993 and 2000, executive incentive pay more than quadrupled from $8.5 million to $35.2 million. In 1995, the level of greed was palpable: of the $7 billion raised by Fannie largely on the basis that the federal government implicitly guaranteed its debts, Johnson and other executives kept $2.1 billion for themselves and their shareholders.
Much of this money was used to buy influence in Congress via campaign contributions and among activist groups such as ACORN, the Congressional Black Caucus and the Congressional Hispanic Caucus. Tens of millions of dollars were also spent on advertising and a raft of pro-Fannie academic studies. All of it was designed to blunt any criticism of Fannie--more often than not with accusations of racism due to Fannie's involvement in billions of dollars of minority sub-prime loans--and undermine several attempts to rein in its now well-documented excesses. Excesses which have cost taxpayers more than $153 billion to date.
How could Johnson get away with it? Two paragraphs from a book review of Reckless Endangerment are very illuminating:
The authors are at their best demonstrating how the revolving door between Wall Street and Washington facilitated the charade. As Treasury secretary, Robert Rubin, formerly the head of Goldman Sachs, pushed for repeal of the Depression-era Glass-Steagall Act that had separated commercial from investment banking--a move that Sanford Weill, the chief executive of Travelers Group had long sought so that Travelers could merge with Citibank. After leaving the Treasury, Rubin became Citigroup’s vice chairman, and "over the following decade pocketed more than $100,000,000 as the bank sank deeper and deeper into a risky morass of its own design." With Rubin’s protégé Timothy F. Geithner as its head, the New York Federal Reserve Bank reduced its oversight of Wall Street.
A tight web of personal relationships connected Fannie, Goldman Sachs, Citigroup, the New York Fed, the Federal Reserve and the Treasury. In 1996, Fannie added Stephen Friedman, the former chairman of Goldman Sachs, to its board. In 1999, Johnson joined Goldman’s board. That same year Henry M. Paulson Jr. became the head of Goldman and was in charge when the firm created many of its most disastrous securities--while Geithner’s New York Fed looked the other way. As the Treasury secretary under George W. Bush, Paulson would oversee the taxpayer bailout of Fannie Mae, Freddie Mac, Goldman, Citigroup, other banks and the giant insurer American International Group (A.I.G), on which Goldman had relied. As head of the New York Fed, and then as the Treasury secretary, Geithner would also oversee the bailout.
Johnson left Fannie Mae in 1998. During his tenure there he amassed more than $100 million in compensation, as well as millions of dollars in guaranteed consulting fees and other perks, including "an office, two secretaries and a car and driver for himself and his wife," according to the Washington Post.
On to Franklin Raines. Mr. Raines was the White House budget director for the Clinton administration during the 1990s. In 1999, he became Chairman and chief executive of Fannie Mae and remained there until 2004, when he was forced to resign less than a week after the Securities and Exchange Commission (SEC) directed the mortgage giant to make "accounting corrections" that would result in $6.3 billion of profits being erased. That figure was amended to $10.6 billion in a 2006 report by Office of Federal Housing Enterprise Oversight (OFHEO) which also alleged that, during Raines' tenure, Fannie Mae "systematically manipulated accounting estimates, ignored accounting requirements it had lobbied unsuccessfully against and operated with weak internal controls that helped obscure the other problems." The OFHEO report further noted that the company "delayed booking $200 million of expenses in 1998, which allowed Raines and other top executives (including James Johnson) to receive millions of dollars in bonuses linked to Fannie's profit."
The level of executive bonus compensation between the years 1998 and 2004 was huge. $115 million was spread around to "Mr. Raines, chief financial officer J. Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae" due to accounting procedures the OFHEO report labeled as "inconsistent with the values of responsibility, accountability, and integrity.”
The government sued Mr. Raines along with two other company executives, seeking $100 million in fines and $115 million in restitution for bonuses "that were not earned." In 2008, a settlement was reached in which Raines relinquished company stock options, proceeds from stock sales and other benefits totaling $24.7 million. Yet according to the Seattle Times, people familiar with the deal contended that stock options, worth $15.6 million at the time they were issued to Raines, were of "negligible value" at the time of the settlement, due to Fannie Mae shares being hammered by the housing meltdown. Moreover while the size of the fine seems large, context reveals otherwise: Raines' total compensation from 1998 through 2004 was $91.1 million, including some $52.6 million in bonuses, according to OFHEO.
For his part in the "irregularities," Raines remained unrepentant. "While I long ago accepted managerial accountability for any errors committed by subordinates while I was CEO, it is a very different matter to suggest that I was legally culpable in any way," Raines said in a statement. "I was not. This settlement is not an acknowledgment of wrongdoing on my part, because I did not break any laws or rules while leading Fannie Mae. At most, this is an agreement to disagree."
Another troubling aspect of the government-led lawsuit against Raines, along with CFO and vice chairman Tim Howard and company controller Leanne Spencer, was the fact that the taxpayers paid the defense costs for the litigation. By the beginning of this year those costs totaled $24.2 million for the three executives--and a staggering $132 million to defend all of the other Fannie Mae officials involved in various securities lawsuits and government investigations.
Where did Johnson and Raines go after Fannie Mae? In 2008, Johnson became part of then-Sen. Barack Obama's vice presidential search committee, but was forced to resign four days later when the Wall Street Journal revealed that he had received questionable loans from Countrywide Financial, which had been the leading purveyor of sub-prime loans during Johnson's tenure at Fannie. Currently he is vice chairman of Persus LLC, an investment firm which saw one of the companies in its portfolio, Vehicle Production Group, awarded $50 million in clean energy loans from the Department of Energy (DOE). Perseus chairman Frank Pearl characterized it as an “absurd idea” that Johnson, listed as a campaign bundler for Obama's 2008 presidential run in which he was committed raising $200,000 to $500,000, used his political influence to help secure the deal. “I doubt there was anybody at DOE that even considered the fact that Jim was part of this firm. We went straight through the proper channels of the [loan] program,” said Pearl.
As for Raines, in 2008 he reportedly took calls from the Obama presidential campaign "seeking his advice on mortgage and housing policy matters." He is currently on the board of directors of Exclusive Resorts, a high-end vacation club. His bio describes him as a "retired Chairman and Chief Executive Officer of Fannie Mae, one of the largest financial institutions in the United States. Mr. Raines has served in President Jimmy Carter's administration and President Bill Clinton’s cabinet as the Director of the Office of Management and Budget, during which time he led the first balanced federal budget in 30 years." He is also listed as a board of trustee member for Enterprise, a company that calls itself "a leading provider of the development capital and expertise it takes to create decent, affordable homes and rebuild communities." One is left to ponder the expertise of a man who helped saddle taxpayers with Fannie's $153 billion bailout.
Yet perhaps the saddest, as well as the most telling aspect of these revelations is the fact that the American public knows so little about them. While much of the public understands the housing meltdown precipitated the worst economic crisis since the Great Depression, it is more than likely that these two men, both of whom walked away with millions of dollars in compensation even as they sowed the seeds of Fannie Mae's demise, remain anonymous figures to the vast majority of the public.
Yet none of their actions or those of the other players involved in the mortgage meltdown would have been possible without government enablers. Government enablers like Reps. Barney Frank (D-MA) and Maxine Waters (D-CA), both of whom remain in positions of power. And incredibly, revealed as recently as July, the Department of Justice (DOJ) is still hectoring lending institutions to make mortgages available to minority applicants who wouldn't otherwise qualify for them.
The Tea Party movement and the OWS movement couldn't be further apart politically if they tried. Yet in one sense they are intrinsically linked in that both groups understand that something is fundamentally wrong with the American experience--and both groups are angry about it. Unfortunately, only the Tea Partiers get it right: Wall Street is beholden to government, not the other way around. That is not to say Wall Street is innocent, only that it is forced to operate within the parameters, no matter how reckless and tainted by corruption, government sets for it.
The order of culpability is critical in that it may determine the winner of the presidential election in 2012. It is no secret that Barack Obama and much of the Democratic Party is engaged in a campaign of class warfare designed in large part to flip that order on its head, blaming "fat cat" bankers and Wall Street in general for the nation's woes, and offering government as a "solution." It behooves whichever Republican emerges as that party's presidential candidate to point out the obvious: men like Johnson and Raines couldn't have gotten as far as they did without the heavy hand of government clearing the way. Moreover, it is absolutely essential for that candidate to make the distinction between crony, and free market, capitalism.
Erecting barriers to competition is a key to maintaining advantage and market share. With Washington leading the way, it makes sense for the big boys to redirect their resources to their lobbying shop and government affairs office.
What should Republicans do? "For every encroachment into the market by the federal government--under the guise of 'reform'--there exist pro-market alternatives that Republicans must articulate and passionately defend," says Ryan. He concludes with something every reasonable American can understand. "This is not a contest for one political party, one sector of our economy, or one segment of the population. We all stand to lose as crony capitalism drains the life from our economy; but we all stand to gain from the fruits that genuine, vigorous, free market competition provides."
Genuine, vigorous, free market competition -- that is the best antidote to men like James Johnson and Franklin Raines.
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