"Soundness" of Fannie Mae questioned -- WSJ

Duh! Home loans are tooooo easy.

"In a 200-page report released late yesterday afternoon, the regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, said its findings "raise concerns regarding the validity of previously reported financial results, the adequacy of regulatory capital, the quality of management supervision and the overall safety and soundness" of the company."

1. (The full story is in the Wall Street Journal 09/23/04) EOM

[Kenneth ken]

2. related/result

there is a story in LBN about a class-action suit against Fannie mae:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x860050

so far that story is dropping like a rock.

[Robbien]

3. There are stories all over the net on Fannie

Talking about removing management, halting the issuance of new mortgage financings, class action suits, and so on. Wachovia Securities downgraded Fannie to ``market perform'' from ``outperform.''

Serious crap going on.

[Rapier2]

4. notes

For 2 years or more I have been posting in this forum regarding the Credit Bubble and the status of the GSE's, the government sponsored enterprises like Fannie Mae, which lie at the very heart of the credit bubble and are the lynchpin or the derivatives fueled financial world.

These problems at Fannie are not new. Till now the public focus has been on its little brother Freddy Mac, where accounting problems in regard to their 'hedging' has been reported. However there was never any doubt that any problems Fredddy had, Fannie has 10 times worth.

It will be a long slog catching up on this stuff if you care to and as always the best place to go is to The Credit Bubble Bulletin.
http://www.prudentbear.com/archive_home_com.asp?category=18

The potential of the problems at Fannie Mae cannot be overstated for they go to the very soundness of the entire financial system. Its problems could make the S&L thing seem tiny.

I won't predict disaster, for we have visited the brink of financial disaster many times since 1987. I will say we seem again to be entering a period of extra vulnerability and it will take a massive concerted effort by the powers that be to keep a lid on Fannie's troubles.

If they can't then this becomes the biggest story in your lifetime.

[Robbien]

5. I agree, hopefully this concerted effort you talk about comes to pass

I believe Fannie rolls over something like $30 billion in debt per week. It would be devastating if the market didn't want Fannie's paper as much because of concerns over its creditworthiness. Rates would have to rise to compensate for the added risk and Fannie's cost of borrowing goes up - further exacerbating the problem.

Then something dark this way comes.

[Charley_Dog]

6. Then something dark this way comes....

And it's name is Jamie Gorelick.

I have a copy of the report from the OFHEO.

The report by the Office of Federal Housing Enterprise Oversight cited one instance in 1998 where the company inappropriately deferred $200 million of estimated expenses, which enabled management to receive full annual bonuses. Had Fannie recorded the expenses in 1998, no bonus would have been paid, the report said.

Here is the list of the Board of Directors:

1998 Salary and Bonus of Senior Fannie Mae Executives

Officer----------------Title----------------------Salary---AIP Award/Bonus

James A. Johnson...Chairman and CEO..............$966,000....$1,932,000
Franklin D. Raines.Chairman and CEO Designate.$526,154....$1,109,589
Lawrence M. Small..President and COO..............$783,839....$1,108,259
Jamie Gorelick.....Vice-Chairman........................$567,000....$779,625
J. Timothy Howard..EVP and CFO.....................$395,000....$493,750
Robert J. Levin....EVP,Housing & Comm.Dev..... $395,000....$493,750

Source: Fannie Mae Notice of Annual Meeting of Stockholders, May 20, 1999



I hope someone will be sending these people a bill to be paid to the order of The American Taxpayers.

7. The FDIC says the MBS notes aren't worth what they are trading at...

It's like the emperor has no clothes, and everyone takes years to admit it.

I am wondering how much the FBI investigation of "rampant mortgage fraud" has to do with this.

[Robbien]

8. Question. Why now?

It was common knowledge Fannie Mae had the same problems as Freddie. Yes, it was probably the whistleblower which prodded the regulatory investigation, but with the tight control BushCo has over the SEC why did they allow the results of the investigation to be published this week? Why not wait until after 11/2?

Why now? Why are they prodding this dangerous giant now?

9. Don't worry, MORE TO COME!

"Now, however, investors know the truth about Fannie Mae: that it is just another scheming corporation run by me-first managers. And this is only an interim report, meaning that there is more to come."
-- NYT Sept 26

http://www.nytimes.com/2004/09/26/business/yourmoney/26watch.html?position=&adxnnl=1&pagewanted=print&adxnnlx=1096254238-TNVfW85id/W3lULXYJzX0g

Fannie is BIGGER than US TREASURY DEBT.

The most likely explanation is it is SO bad, they dare not wait until after the election to mention it. Remember, there is a paper trail related to the problems a mile long, that we know about.

There must be some REALLY dirty stuff that will trickle out after the election. But now, they can say they didn't postpone it until after, when it all blows up.

NOTE the story above!

[Rapier2]

10. Now because

this is when the year long investigation ended. THe report is by the Office of Fed Housing Enterprise Oversight, which appararantly was set up when the GSE's were.

It should be noted that two years or so ago the head of the OFHEO issued a paper concering the SYSTEMATIC risk inherent with the GSE's. This was a major heresy. The Great Chairman himself, Greenspan, never tires of lauding the stabilizing properties of modern derivatives and derivatives are the GSE's stock in trade. In fact, not following too closely I thought that Falco (?) the guy issuing the paper had been sent packing. How he survived I do not know.

Politically there seems to be, astoundingly, a bit of antagonism within theWhite House for the GSE's. I'll take a guess and say this is really just a divice to distance themselves from them if there is a meltdown.

The head of Fannie Mae is one Franklin Raines. A real smooth operator who has all politicians in the palm of his hand, from both parties. His salary last year, or maybe it is this year, $17million with another $3 million or so in options. He isn't too visible but occasionally you see him touting the success of Fannie Mae in delivering the American Dream in the form of home "ownership" to so many.

Who can be againgst that?

The core of this report explains that the issue is how they account for their derivative positions. What they have done is to ignore the standards set out for them in order to "smooth" out their "earnings".

While there was a comment above about what their role is, buying and then reselling mortgages, the thing is that they retain a huge book of mortgages for themselves, $3trillion jumps to mind but what ever the exact amount just know it is huge. Since they borrow short term to lend long term(and borrow at ultra favorable rates due to their supposed but not actual government guarantee)it is necessary for them to hedge their 'book' of mortgages. It is this hedging, thru derivatives which is the focus of this current dust up.

Somone mentioned how any problems with them would not be a big deal. This is WRONG. Firstly it was the mortgage game itself, and the never faltering home values thru the stock selloff and recession of 2000-2002 which saved the system in that the massive borrowing was the main liquidity generator for the economy, our and really the worlds. Secondly a percieved problem with their paper, their debt and their ability to meet their obligations to counterparties in derivative deals could very well cause a financial panic of historic proportion.

To understand todays economics you must understand that the be all and end all is for asset prices to contiue to rise, stocks and real estate that is. These are not considered inflation after all don't you know. Inflation is mainy, in the eyes of Greenspan and the entire financial world, is rising wages. THey view that with horror. Or would if there was any, but no, we have none of that. You see wealth is now only created when asset prices rise. God forbid citizens might have rising wages or horror of horror, savings. I mean like cash savings. All 'savings' must be in stocks and real estate. So buy more we are told and they will rise in price, not inflate mind you, and we will be rich.

Adam Smith would puke.

[Rapier2]

11. $1 trillion

Fannie Mae holds cool trillion in mortgages and mortgage backed securities. Those are their assets.

They have nearly as much in liabilities, half of which are short term, a year or under.

If for some reason, and there are many of them, that the market lost its appetite for Fannie's short term paper then they would be in serious trouble.In fact the spread on Fannies paper over Tbills has been creeping up. At the least, there goes their 'profits'. At worse, well you don't want to imagine it.

By the way, that almost trillion in liabilites exceeds the Feds assets, which are in the $800 billion range.

[Rapier2]

12. $ 1 trillion

Fannie Mae holds cool trillion in mortgages and mortgage backed securities. Those are their assets.

They have nearly as much in liabilities, half of which are short term, a year or under.

If for some reason, and there are many of them, that the market lost its appetite for Fannie's short term paper then they would be in serious trouble.In fact the spread on Fannies paper over Tbills has been creeping up. At the least, there goes their 'profits'. At worse, well you don't want to imagine it.

By the way, that almost trillion in liabilites exceeds the Feds assets, which are in the $800 billion range.

[rapier]

13. notes on the credit bubble and Fannie's role

http://www.prudentbear.com/randomwalk.asp