“Cry havoc, and let slip the dogs of HUD!”
With the fall of its CEO, CFO, and auditors, Fannie Mae may have hoped that its troubles are over — but it seems clear that the big beast’s weakness has emboldened its critics and started a process both regulatory, political, and to some degree vengeful :
For years, Fannie Mae has fielded an armada of lobbyists and legislative aides that effectively crushed opposition to its business practices and silenced critics on Capitol Hill. The accounting scandal at the company has given its critics in Congress and in the White House an opportunity to focus attention on Fannie Mae’s overall structure and mission.
Senate Banking Committee Richard Shelby (R-AL), made clear that Congress will be seeking to tighten oversight and discipline on Fannie Mae (and most likely, its counterpart Freddie Mac ):
The dismissal “does not obviate the need for enhanced regulation,” [Shelby] said in a statement, adding that “if anything, this change in management reinforces the need for comprehensive regulatory reform.”
Congress is thus very likely to move
early next year to create a new regulatory agency for government-sponsored enterprises like Fannie Mae and its smaller brother, Freddie Mac. The legislation, expected to have the strong backing of the Bush administration, would grant the agency the power to bar such companies from creating new lines of business, a move that Mr. Raines has opposed, saying it could raise the cost of borrowing money for new homeowners.
Ranking minority member Barney Frank (D-MA-4), widely acknowledged as Congress’s sharpest wit and in our view easily its member most knowledgeable about banking and affordable housing issues :
“I want them to be better regulated, but not at the expense of housing,” Mr. Frank said. “I’m afraid that the right wing will use Frank Raines’s mistakes and inappropriate actions to go after housing and to restrict Fannie Mae over all in the amount of activity it engages in.”
Indeed, some of the glee that we expect to be ill-disguised among Fannie Mae critics will be schadenfreude at taking down a private company that paid its executives very handsomely :
Over the last three years, [CEO Frank Raines] has made $14 million in salary and bonuses and taken home $25.6 million in incentive pay. As of the end of last year, he held options on 1.9 million shares of Fannie Mae stock, valued at almost $12 million.
The executives are likely to receive large severance/ pension packages even as they are leaving under a cloud :
Rep. Barney Frank (D-Mass.), ranking Democrat on the House Financial Services Committee, said it was appropriate for Raines and Howard to go. He added that the severance Raines could get “is excessive and really extremely inappropriate, given the circumstances of his leaving, so I would call on Fannie Mae and Raines both to renegotiate that.” “If Frank Raines takes all that, he’s wrong,” he said. “That kind of mistake and the problems that they’ve been through should not be so generously rewarded.”
And Mr. Frank’s recommendation has legal teeth :
Under the Sarbanes-Oxley Act of 2002, chief executives and chief financial officers are required to give back incentive-based bonuses if the company has to restate its earnings because of financial misconduct. One attorney said yesterday that the law probably wouldn’t apply to misconduct prior to 2002. But he said that plaintiffs in a lawsuit could argue that other legal precedents dictate that the bonuses were ill-gotten and need to be returned.
That compensation investigation is already underway . Fannie Mae is also widely perceived, even if only in muttered corridor asides, to have spread too much lobbying largesse and had too much political arrogance:
Together, [Fannie Mae and Freddie Mac] spent $11.7 million during the first half of this year lobbying against further control, according to PoliticalMoneyLine, a nonpartisan group that tracks campaign finance and lobbying.
But some is based on self-interested policy arguments surrounding the extent to which government-aided entities should be poaching on private-sector market areas:
“The fear among other mortgage industry players is that Fannie Mae and Freddie Mac, to keep up with their promised growth, will creep into different aspects of originating loans,” said Jonathan G. S. Koppell, a professor at the Yale School of Management who has studied quasi-governmental financial institutions. “The banking industry has a lot to lose if Fannie starts picking off its business, and it’s hard to compete with them because Fannie can borrow money more cheaply.”
So now that Fannie is politically very wounded, there will break out all kinds of jockeying for advantage, but this is likely to occur in a very restrained and complex way, for everyone recognizes what few will say — Fannie Mae and Freddie Mac, as GSEs, are a great tools for government indirectly to further affordable by harnessing private-sector motivations to government advantages and outcome-oriented government regulation. Not only is Fannie Mae literally too big to fail, all this controversy has barely rattled the stock price, in part because everyone knows that Fannie Mae is both financially successful and socially effective :
Fannie Mae appears to remain a financial powerhouse despite the prospective earnings restatements. It had income of $7.9 billion last year – an increase of more than 70 percent from $4.6 billion in 2002. Its loan losses have plunged in the last decade, and its mortgage portfolio has expanded to about $900 billion last year from about $200 billion in 1993.
In any protracted political trench warfare, regulators are often outgunned — out-lawyered, out-lobbied, out-thought — by well capitalized, potent private entities. So when they get a window to redress the balance, they will seize it, egged on by those purely private entities who see the chance to regain lost market share. So the markets have concluded, quite rightly, that Fannie Mae will not only prevail but continue to thrive :
Investors, however, seemed to shrug off the possibility of further setbacks at the company yesterday. Fannie Mae’s stock price rose $1.57, or more than 2 percent, to $71.92, and the spread between the yields on the company’s debt and 10-year Treasury notes narrowed slightly.
But with what narrowed mission, and with what further new restrictions or oversight? That’s what the coming fight will be about.
