Fannie Mae: the story so far
Are you new to the Fannie Mae scandal? Disoriented? Feeling trapped?
Where am I?
In the GSE mess.
What do you want?
Explanation. We want … explanation.
Feel like you’re arrived halfway through the movie and you don’t know who is who? Need a condensed and hyperlinked summary? Here it is, in six acts and nearly fifty scintillating blog posts.
1. The scandal breaks
In December, 2004, Fannie Mae announced roughly $9 billion in writedowns (12-20-04, How much is perception worth?) A year later:
· More accounting boo-boos were still surfacing (11-16-05, The rumble of distant thunder)
· Including revelations of artificial earnings smoothing (02-24-06, Botoxed earnings and the Holy Grail defense, and
· This week’s bombshell OFHEO report (05-24-06, Blasting Fannie Mae).
Being investigated by OFHEO.
2. The dirty laundry airs
Said Emperor Claudius, late in his imagined reign, “Let all the poisons that lurk in the mud, hatch out.” The scandals triggered an OFEHO investigation (12-23-04, “Cry havoc, and let slip the dogs of HUD!”) and bit by bit, out came dirty laundry, such as:
- Accountant disquietude (12-29-04, Closing the books … or not?)
- Claims that the executives were overpaid because their performance bonuses were based on earnings that OFHEO later called “an illusion” (01-06-05, Fannie Mae: Was it just enrichment?)
- Exposes and critiques of the distorting effect of bonus formulas (01-20-05, GSE executive bonuses and corporate culture)
- SEC claims of inappropriate accounting (02-10-05, GSE accounting: Clear to you ain’t clear to me)
- Class-action shareholder litigation (02-24-05, First, you sue)
- Lax or questionable internal financial controls (02-25-05, More bad news for Fannie Mae)
- False signatures on accounting transactions (04-08-05, Fannie Mae: “False signatures”)
- Sharing lobbyists with their competitor, Freddie Mac (02-23-06, There’s no G, S, or E in duopoly, is there?)
- Ignoring flags raised within the organization (03-31-06, Fannie Mae: Warnings, what warnings?)
3. The penance begins
Immediately after the scandal broke, Fannie Mae sought to repair the damage and do public penance, starting with the departure of CEO Franklin Raines and CFO Timothy Howard (12-22-04, Heads roll at Fannie Mae), although whether these were firings or resignations was disputed (12-29-04, Fannie Mae: did he fall or was he pushed?). In short order three more senior executives left (01-25-05, Fannie Mae dominoes) just after Fannie Mae fired its auditors (01-05-05, Change your audit partners, do-si-do).
Meanwhile, the company:
· Suddenly needed cash to plug an OFHEO capital-sufficiency gap (12-30-04, Brother, can you spare $5 billion?)
· Was urged to reduce its portfolio exposure (01-21-05, Fannie Mae and Jane Austen’s “Persuasion”)
· Signed a supplementary agreement with OFHEO (03-09-05, Fannie Mae’s penance begins)
· Rethought its big salaries (03-25-05, Fannie Mae changes how it pays people)
· Endured some sharp words from the Treasury secretary (04-09-05, Snow falling on Fannie).
In response, Fannie Mae’s new CEO verbally genuflected (04-20-05, Fannie Mae: Contrition is free), and suggested there was no need for tighter oversight because the market was doing an effective job of competing (12-09-05, GSEs: Fierce competition. Fierce).
4. Regulators huddle
A massive scandal at a publicly-chartered and publicly-supported private corporation naturally demands a review of its oversight, so immediately the question arose (01-24-05, Who should regulate Fannie and Freddie?), and who should it be (02-01-05, GSEs: New regulators for old?). Proposals were floated (04-12-05, GSE reform legislation introduced), debated (05-25-05, GSEs: how to regulate?), and reported out of the House of Representatives (05-26-05, Fannie Mae: half-tithing?).
What moves can we make?
Confronted with differing views from the Administration (05-30-05, GSE regulation: read the menu!), the Senate bestirred itself (07-20-05, Political doldrums and Fannie Mae), although with summer adjournment, activity stalled (07-26-05, GSE regulation: a breath of hot air?).
5. Thinkers weigh in
The GSEs receive huge Federal benefits (12-28-04, Fannie Mae’s awfully big advantages), and as the Long-Term Capital Management fiasco demonstrates, harnessing a behemoth is no easy task (01-03-05, A puzzle with no solution?). Academics and analysts disagree sharply (01-10-05, GSEs: What do they cost? What do we get?) and Fannie Mae’s critics (like the Wall Street Journal) find much to decry (01-14-05, GSE guarantee fees: fair or foul?).
Get me our lobbyists!
More importantly, because the GSEs have a unique status as a Federal stepchild, when they falter, taxpayers may be at risk (03-22-05, GSEs: risks that flesh is heir to), so many were curious to see how the respected Federal Reserve chairman would view them (04-06-05, Fannie Mae: What Will Greenspan Say?); unsurprisingly, he was critical (04-07-05, GSEs: Greenspan frowns … clearly), and before leaving office, Mr. Greenspan de-cloaked his feelings (02-16-06, GSEs: Greenspan’s last testament).
6. Why should you care?
Is this just housing’s Enron? Does it have any impact on normal folks? Or in public-policy terms?
The GSEs benefit from unique Federal legislation, their charters, that confer upon them billions of dollars annually (12-28-04, Fannie Mae’s awfully big advantages), in exchange for which taxpayers and legislators expect improved housing affordability (01-02-05, GSE affordable housing goals). For years if not decades, some have questioned the bargain (02-12-05, GSEs: Under-serving or un-deserving?), but even as the Administration has given no direction (04-01-05, note the date!, President nominates Fannie Mae board), Fannie Mae’s securities are pervasively intertwined with corporate America (03-01-05: Fannie Mae: Too big to sell?).
Everybody loves a large market cap!
In this debate, the GSEs have many partners and beneficiaries who advocate their cause (07-27-05, Housing: lobbies and lobbying), although they have a small but influential band of implacable critics (01-19-06, GSEs: with enemies like these).
7. What happens now?
Whose side are you on?
That would be telling. We want … regulation … regulation … regulation.
You won’t get it!
By hook — or by crook — we will.
“Be seeing you.”