Wednesday, October 1, 2008

Fannie Mae almost failed in the 80's

Fannie Mae under the leadership of James A. Johnson worked to keep up with Wall Street expectations.  The company began holding on to more mortgages and mortgage-backed securities for investment purposes. The same practice nearly drove the company into bankruptcy in the early 1980s, when interest rates strayed into the double digits. Its smaller rival, Freddie Mac, copied the strategy. 

Around the time Freddie Mac's accounting scandal broke in 2003, the companies' combined portfolios totaled $1.5 trillion.  Then-Federal Reserve Chairman Alan Greenspan and others came to fear that a sudden meltdown at Fannie Mae could bring down the financial markets with it -- an argument that Johnson and his successor, Franklin D. Raines, fought at every opportunity. 

They assured investors and policymakers that no such thing could happen because the company was so well managed.  James was also a managing director with Lehman Brothers (1985-1990).  Mr. Johnson has been a director of Goldman Sachs since May 1999.  Its sizable profits made during the 2007 Subprime mortgage financial crisis led the New York Times to proclaim that Goldman Sachs is without peer in the world of finance.  Then a crisis hit and in September 2008 Goldman Sachs became a traditional bank.  It had been an investment bank since 1869 during which time it had survived the Great Depression. 

Franklin Raines served from 1991 to 1996 he served as the vice chairman of Fannie Mae.  He left the company in 1996 to join the Clinton Administration as the Director of the U.S. Office of Management and Budget, where he served until 1998.  In 1999, he returned to Fannie Mae as CEO, "the first black man to head a Fortune 500 company."  In 2004 the New York Times reported that regulators "have said that of the $90 million paid to Mr. Raines from 1998 to 2003 at least $52 million—more than half—was tied to bonus targets that were reached by manipulating accounting." Raines agreed to a $24.7 million settlement with a federal regulator in exchange for charges being dropped, but he admitted no wrongdoing.  As so often happens with large scandals, the cost will fall on everyone except the responsible parties.  He was forced to leave Fannie Mae in 2004, when regulators discovered it had broken accounting rules "in an effort to conceal fluctuations in profit and hadn't maintained adequate risk controls."  In 2006, federal regulators sued Franklin Raines and two other Fannie Mae executives to recover $115-million of compensation. The case was settled for $3-million, plus the surrender of some of the then probably valueless stock options and other contingent benefits. The $3-million was paid from Fannie Mae’s own insurance.  An editorial in The Wall Street Journal called it a "paltry settlement" which allowed Raines and the other two executives to "keep the bulk of their riches."

Jamie S. Gorelick, whose official résumé describes her as "one of the longest serving Deputy Attorneys General of the United States," a position she held from 1997 to 2003.  Although she had no background in finance, she joined Fannie Mae in 1997 as vice chair and departed in 2003.   Gorelick collected a staggering $26.4 million in total compensation, including bonuses, during her time at Fannie Mae. Once again Fannie Mae was under investigation.  Investigators would later say that "Fannie Mae's management directed employees to manipulate accounting and earnings to trigger maximum bonuses for senior executives from 1998 to 2003." The New York Times called the manipulations an "$11 billion accounting scandal." Gorelick, it should be noted, has never been charged with any wrongdoing.  Then again she was a Deputy Attorneys General of the United States during the period in question.  She also served on the 9/11 commission.


Alicia said...

Good grief! I'm speechless! How do the big and all mighty get away with such crimes w/o jail time?

Today my 28 year old son, taking his wife to work who is 8 months pregnant, gets pulled over by a cop. Broad daylight, middle of the day and this guy asks him if he has any guns or drugs and if he minded if he searched his car. My son says, see my wife? She's already late for work, and if you do that she's really going to be late for work. And the cop lets him go "this time."

And that is the difference between the upper class schmucks who break the law and the other, regular people, just trying to make a living.

Dark Star said...

Gorelick, it should also be noted, sat on the 9/11 commission AFTER be the primary architect - as Bill Clinton's Deputy Attorney General - of the infamous "Wall" which prevented our intelligence agencies from sharing information with one another on suspected terrorists. See:

Tom McLaughlin said...

That would be the James Johnson who chaired Barack Obama's vice presidential search committee, wouldn't it?

Curious silence about this in the MSM.