The story should, and can, now be told of the fever-pitch greed driving the leadership of mortgage giants Fannie Mae and Freddie Mac that led to the housing bubble, its collapse and, consequently, our long, destructive recession with record budget deficits and joblessness.
There’s no legitimate reason why taxpayers now, in effect, are being robbed to pay for the greed and expensive and deliberate trickery of former executives of mortgage lenders Fannie Mae and Freddie Mac. Unbelievably, those who caused our national economic turmoil are having the taxpayers pay $160 million for their defense in lawsuits. As The New York Times reported Jan. 24, since the government took over Fannie and Freddie, taxpayers have paid the legal bills of former top executives, lawsuits which accused them of fraud.
These crooks who “cooked the books” at Fannie and Freddie are men Barack Obama reportedly turned to for advice as well as for campaign donations.
A 338-page report of the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates the twin mortgage lenders, was issued in 2006 at a time when Fannie Ma was struggling to emerge from a $22 billion scandal. The blistering report alleged accounting manipulation that was aimed at filling the pockets of executives and lying to investors about sensational growth in profits. Hundreds of thousands of investors were taken in by the optimistic profit reports.
When Franklin Raines became chairman and CEO of Fannie in 1999, he was eager to lead it into an era of growth and profits and double earnings per common share (EPS). His compensation was based on such earnings increase. So, he rigged the compensation program to promote incentives to achieve that goal. Financial rewards “tied to a measure of profit, which management could easily manipulate” became the means to over-pay senior management. More than $52 million of Raines’ compensation of $90 million “was directly tied to achieving EPS targets,” the report said.
The frantic drive to double Fannie’s earnings per share from $3.23 in 1998 to $6.46 by 2003, and increase the pay for all senior employees, was enbodied in a stirring pep talk (disclosed in the report) made by Sam Rajappa, senior vice president and head of the Office of Auditing:
“By now” he spouted, “ every one of you must have 6.46 branded into your brain. You must be able to say it in your sleep; you must be able to recite it forwards and backwards. You must have a raging fire in your belly that burns away all doubts. You must live, breathe, and dream 6.46….After all, thanks to Frank [Raines] we all have a lot of money riding on it…Remember Frank has given us an opportunity to earn not just our salaries, benefits, raises…but substantially above if we make 6.46. So it is our moral obligation…”
The compensation program obviously provided powerful incentives for senior management “to engage in improper earnings management and other unsafe and unsound practices,” as the OFHEO report said. Raines and CFO Timothy Howard wanted to convey the image Fannie was “best in class” in risk management. This image “was false” and “a façade.” the report said. “Compensation for senior executives linked to EPS dwarfed basic salary and benefits.”
Raines was formerly the Budget Director for Bill Clinton.
Freddie Mac was created in 1970 to expand the secondary market for mortgages. In 2003, Freddie revealed it had understated its earnings by $5 billion, and it was fined. Then-President Bush called for regulatory controls; but Congressional Democrats opposed them, fearing such would reduce financing of loans for low-income borrowers—the voter base of many Democrats. High- risk loans were being encouraged, particularly by Rep. Barney Frank (D-Mass) and Sen. Chris Dodd (D-Conn.)
In 2006 Freddie was fined $3.8 million by the Federal Elections Commission for illegal campaign contributions. Campaign money given by both Freddie and Fannie went to Obama and some members of Congress.
Freddie Mac “cast aside accounting rules, internal rules, disclosure standards, and the public trust in the pursuit of steady earnings growth, said a report of a special examination of Freddie by the Office of Federal Housing Enterprise Oversight.
The corporate culture “resulted in intense and sometimes improper efforts by the Enterprise to manage its reported earnings” and enter “into transactions with little or no economic substance” to fool investors into thinking they had “steady earnings growth.” Freddie called itself “Steady Freddie.” “[O]perations risk was not a problem….The size of the bonus pool for senior executives was tied, in part, to meeting or exceeding annual specified earnings per share goals… and consequently the bonuses based upon them would be achieved in the future.”
Obama, fresh out of law school in the early 1990s was training community organizers in Chicago on how to intimidate bankers and demand that they make mortgage loans to credit-shaky minorities.
According to Snopes.com Raines left Fannie with a golden parachute valued at $240 million. Charges against Raines caused the Court to order Raines to return $50 million of his bonuses. In 2008, the federal government took control of both Fannie and Freddie.
Jump to the present and the $160 million in legal bills that U.S. taxpayers are stuck with. The cost was a secret until a couple of weeks ago, when Congress called for an accounting. Some $132 million of the money, The New York Times story said, went to defend Fannie Mae and its officials in suits and investigations into accounting irregularities that took place before the subprime lending crisis erupted. Since Fannie and Freddie were taken over by the government, their losses from bad mortgage loans now total $150 billion, the story said.
Rep. Randy Neugebauer (R-Tex), now chairman of the Oversight Subcommittee of the House Financial Services Committee, had asked last year for the legal fee figures from the Federal Housing Finance Agency. That agency acts as conservator for the mortgage giants, trying to preserve the assets on behalf of the taxpayers.
A report from the Treasury Department on the future of Fannie and Freddie will be delivered to Congress “in the first half of February,” according to a Bloomberg Jan. 24 report.
Meanwhile, taxpayers should keep a firm grip on their wallets.
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