Tuesday, December 09, 2008

The Guilty Don't Feel Guilty; They Learn Not To

Freddie and Fannie Edition.

From the AP today and August 5, 2008.

E-mails and other internal documents released by the House Oversight and Government Reform Committee show that former Fannie Mae CEO Daniel Mudd and former Freddie Mac CEO Richard Syron disregarded recommendations that they stay away from riskier types of loans.

Fannie and Freddie own or guarantee around half the $11.5 trillion in U.S. outstanding home loan debt. The two companies are the engines behind a complex process of buying, bundling and selling mortgages as investments.

They traditionally backed the safest loans, 30-year fixed rate mortgages that required a down payment of at least 20 percent. But in recent years, they lowered their standards, matching a decline fueled by Wall Street banks that backed the now-defunct subprime lending industry.

The documents show that Freddie Mac's former Chief Risk Officer David Andrukis sounded warnings as far back as 2004 about the risks posed by loans in which borrowers didn't provide proof of their incomes or detail their assets, according to e-mails released by the committee. In an interview with investigators, Mr. Andrukis recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that "would likely pose an enormous financial and reputational risk to the company and the country." Moreover, Mr. Syron received a memo stating that the firm's underwriting standards were becoming shoddier and that the company was becoming exposed to losses. In a 2004 meeting with Mr. Andrukis, however, Mr. Syron refused to consider possibilities for reducing Freddie Mac's risks. Mr. Syron told Mr. Andrukis that he "couldn't afford to say no to anyone." Mr. Syron ended up firing Mr. Andrukis for, in his words, "a variety of [unspecified] reasons . . . not primarily for his having a view on credit."

According to Rep. Henry Waxman, D-Calif., chairman of the committee,
such "irresponsible decisions are now costing the taxpayers billions of dollars."

The two companies were seized in September by government regulators after stock prices fell by more than %60, destroying more than $80 billion of shareholder value. Two months later, Freddie Mac asked for an injection of $13.8 billion in government aid after posting a massive quarterly loss. Fannie Mae has yet to request any government aid but has warned it may need to do so soon.

For his part, Mr. Syron collected more than $38 million in compensation from 2003 through 2008.

The documents presented by the House committee included an internal Fannie Mae presentation from June 2005 that showed the company at a "strategic crossroads," at which it could either delve into riskier loans or focus on more secure ones.

"We couldn't afford to make the bet that the changes were not going to be permanent," Mr. Mudd said.

Lawmakers, in questioning that lasted more than four hours, were clearly frustrated by what they called a lack of willingness among Syron and Mudd, plus former Fannie Mae CEO Franklin Raines and former Freddie Mac CEO Leland Brendsel, to share any of the blame for the companies' fortunes.

"All four of you seem to be in complete denial that Freddie and Fannie are in any way responsible for this," said Rep. Darrell Issa, R-Calif. "Your whole excuse for going to risky and unreasonable loans that are defaulting at an incredibly high rate is that everyone is doing it."

The ability of the companies to capitalize on the perception they were implicitly backed by the government allowed them to borrow at relatively low rates and use those funds to buy mortgages as investments. The companies also collected fees in exchange for guaranteeing that borrowers would repay other home loans.

By the end of 2007, the firms held mortgages worth more than $1.4 trillion combined, and guaranteed payments on loans worth $3.5 trillion more.

Both firms had sophisticated systems to hedge against risks. But they remained exposed to one unlikely, but potentially catastrophic possibility: a wide-scale decline in national home prices.

The only real protection against such a downfall was purchasing only the safest loans.

Executives of both companies maintained that one of the reasons the firms held so many bad loans was that Congress leaned on them for years to buy mortgages from low-income borrowers to encourage affordable housing while shareholders constantly attacked the executives for missing profitable opportunities by being too cautious.

Others, however, dismiss that explanation. "Sure, it's hard to deal with the pressures of Congress and shareholders and regulators," said a former high-ranking Freddie Mac executive. "But that's why executives get paid so much. It's not acceptable to blame those pressures for making bad choices."

Mr. Syron and Mr. Mudd eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.

The thinking was that if something really bad happened to the housing market, then the government would need Freddie and Fannie more than ever, and would have to rescue them," Mr. Andrukonis said. "Everybody understood that at some level the company was putting taxpayers at risk."

Mr. Mudd has asserted that the companies were merely victims of circumstance. A company spokesman added that, "there is little to nothing that Freddie Mac could have done to prevent the losses."

Documents and interviews of company employees show, however, that the executives were specifically and repeatedly advised from 2004 onward to increase their capital cushions and to scale back on mortgage purchases.

In November 2007, after Treasury Secretary Henry M. Paulson, Jr. and Federal Reserve chairman Ben S. Bernanke privately urged both companies to raise more money, Fannie Mae raised $14.4 billion from shareholders. Freddie Mac's Syron was more resistant. The company ended up raising $6 billion in preferred stock in 2007 while Mr. Syron combatively dismissed suggestions he would raise more simply because officials told him to. "This company will bow to no one," Mr. Syron told a room of investors and analysts in March of this year.

In 2007, as home prices were falling and defaults rising in some areas, Fannie Mae finally shrunk its mortgage portfolio, albeit slightly. Mr. Syron's Freddie Mac, however, increased its portfolio by $17 billion. That same year the companies posted combined losses of $5.2 billion. Analysts say they may lose an additional $24 billion or more this year.

Documents also highlight Freddie and Fannie's extraordinarily aggressive and expense lobbying campaign to thwart off repeated attempts to impose tighter restrictions on the companies. According to the AP, internal Freddie Mac budget records reflect $11.7 million paid to 52 outside lobbyists and consultants in 2006 alone. Former Fannie Mae CEO Raines defended his company's lobbying, saying that "Fannie Mae, like any other corporation owned by shareholders, came to Congress and expressed its views."

, ,

Monday, December 01, 2008

Deficit Hawks Have Got It All Wrong

Krugman on why increasing the federal budget deficit is not a valid reason for opposing massive government spending to prevent economy from falling further (paraphrased).

People who think that fiscal expansion (i.e., government spending) today is bad for future generations have it exactly wrong. The fact is that fiscal austerity will worsen the economy now and in the future.

Deficit worries are based on the notion that government spending "crowds out" private investment -- that the government, by issuing lots of debt, drives up interest rates, which makes businesses unwilling to spend on new plant and equipment, and that this in turn reduces the economy's long-run rate of growth. This reasoning is sound, under normal circumstances. Current long and short term interest rates are already at historic lows, yet private investment continues to plummet. Moreover, two cases (US in 1937 and Japan in 1996-1997) demonstrate that reducing government spending during times of depressed economy lead to steep falls in private investment. In both cases the government pulled back in the face of a liquidity trap, a situation in which the monetary autority had cut interest rates as far as it could, yet the economy was still operating below capacity. We are in the same kind of trap today, which is why deficit worries are misplaced. Right now we have a short fall in private spending and government spending must be used to take up the slack, particularly by investing in infrastructure items that will make the nation richer in the long run.

Wednesday, July 23, 2008

Mukasey's Refusal To Investigate Torture War Crimes

Using Law To Justify Torture, Daphne Eviatar via Washington Independent:

For months now, Atty. Gen. Michael Mukasey has refused to investigate whether Bush administration officials committed war crimes by authorizing the torture of suspected terrorists. His reasoning? Any actions were authorized by the administration’s lawyers, and so cannot constitute a crime. As he wrote to Rep. John Conyers (D-Mich.), one of 56 House Democrats who last month called on Mukasey to appoint a special counsel: “It would be both unwise and unjust to expose to possible criminal penalties those who relied in good faith on ... prior Justice Department opinions.”
But do the administration’s legal memos put the matter to rest? Does soliciting a set of self-serving opinions actually shield senior government officials from prosecution?

Probably not, according to many constitutional scholars and lawyers. Indeed, the Justice Dept. itself would never accept, on face value, any suspected criminal’s defense that he had been relying on advice of counsel. Rather, legal experts say, that advice must have been a reasonable interpretation of the law, based on a thorough knowledge of the facts, and provided before the suspect acted. So when it comes to policymakers authorizing torture, the administration’s defense appears to fail on all grounds.

Monday, July 07, 2008

We Were Warned

Look No Further Than The Driveway, America. Via NYT:

Over the last 25 years, opportunities to head off the current crisis were ignored, missed or deliberately blocked, according to analysts, politicians and veterans of the oil and automobile industries. What’s more, for all the surprise at just how high oil prices have climbed, and fears for the future, this is one crisis we were warned about. Ever since the oil shortages of the 1970s, one report after another has cautioned against America’s oil addiction.
Nearly 70 percent of the 21 million barrels of oil the United States consumes every day goes for transportation, with the bulk of that burned by individual drivers, according to the National Commission on Energy Policy, a bipartisan research group that advises Congress.

Tuesday, July 01, 2008

Truth is Out on Torture

Milt Bearden, former career CIA, via The Washington Independent:

Throughout this ugly drama, U.S. leaders have assured the public that the extreme interrogation measures used on detainees have thwarted acts of terrorist and saved thousands of American lives. The trouble with such claims is that professionals who know something of interrogation or intelligence don’t believe them. This is not just because the old hands overwhelmingly believe that torture doesn’t work -- it doesn’t -- but also because they know that torture creates more terrorists and fosters more acts of terror than it could possibly neutralize.

The administration’s claims of having “saved thousands of Americans” can be dismissed out of hand because credible evidence has never been offered -- not even an authoritative leak of any major terrorist operation interdicted based on information gathered from these interrogations in the past seven years. All the public gets is repeated references to Jose Padilla, the Lakawanna Six, the Liberty Seven and the Library Tower operation in Los Angeles. If those slapstick episodes are the true character of the threat, then maybe we’ll be okay after all.

Heckuva Job

Via NYT:

After the Sept. 11 attacks, President Bush committed the nation to a “war on terrorism” and made the destruction of Mr. bin Laden’s network the top priority of his presidency. But it is increasingly clear that the Bush administration will leave office with Al Qaeda having successfully relocated its base from Afghanistan to Pakistan’s tribal areas, where it has rebuilt much of its ability to attack from the region and broadcast its messages to militants across the world.

Wednesday, June 18, 2008

Lawyers Concocted Torture Schemes

via McClathcy:

WASHINGTON — The framework under which detainees were imprisoned for years without charges at Guantanamo and in many cases abused in Afghanistan wasn't the product of American military policy or the fault of a few rogue soldiers.

It was largely the work of five White House, Pentagon and Justice Department lawyers who, following the orders of President Bush and Vice President Dick Cheney, reinterpreted or tossed out the U.S. and international laws that govern the treatment of prisoners in wartime, according to former U.S. defense and Bush administration officials.


Friday, May 30, 2008

The McClellan [Over]Reaction

So many layers get uncovered with this story. Particularly striking, is the unsurprising reaction of the media to the claims that they were lapdogs in the lead up to the war. Most folks, I believe, figured the barn door was shut on this topic, but journalists, newsreaders and other hacks, just like the current administration and stand-up comedians, do not like to be criticized, no matter how cogent the knock. A standard response coming out the last few days is similar to the Hillary Clinton justification to vote for the Iraq War Resolution. It goes something like this:

How could we have known that the what the President and other administration officials said about the threat posed by Iraq was flawed and/or patently false? How could we have known that what we all figured would be a nice, short, tidy little war, with great patriotic visuals for the folks back home (for that is what the administration promised us), would turn into a sectarian bloodbath and 5 year plus counter-insurgency quagmire? We asked all the hard questions and the President, and even Colin Powell, gave their word that this unprovoked war was necessary. Heck, it was even desperately urgent to save us from a nuclear strike that would make 9/11 look like a walk in the park. How could we have known?!

As Salon's Glenn Greenwald points out, in reviewing McClellan's book, Tim Rutten, the LA Times media "critic," joins the choir of voices defending those journalists who couldn't be bothered with doing their jobs, i.e. acting as independent inquirers as opposed to White House stenographers. According to media "critic" Tim Rutten:

The news media, no less than the nation, endured a wrenching trauma on 9/11 and no less than any other institution in society felt the moral obligation to demonstrate solidarity with a country under deadly threat. In that situation, not giving the administration the benefit of the doubt, when it presented "facts" it said were based on the best and most sensitive intelligence available from the CIA and other spy agencies, would have been mindlessly adversarial. Moreover, since the media lacked the ability to do original reporting on the ground in Iraq, what basis would there have been for contradicting the administration's assessment of Saddam Hussein's aims?

Greenwald highlights the absurdity of these comments.

There's that standard media excuse: it was impossible for journalists to do anything except spout what the government was telling them. . . . Apparently now, in the U.S., when our Government wants to start a war by attacking another country that hasn't attacked us, it's the duty of the media to presume that they're telling the truth about everything, and it would be extremely irresponsible -- "mindlessly adversarial" -- for them to do otherwise. I just can't even add anything to that.

For his part, NBC White House correspondent David Gregory is willing to level criticism at anyone besides himself and other reporters. According to Gregory, the fault that the American people heard only one side of the story, that of the Bush/Neo-Con marchers onto war, was the fault of, well, the American people. After all, according to Gregory, its not the press's responsibility to question the President when he lies the country into war.

I think the questions were asked. I think we pushed. I think we prodded. I think we challenged the president. I think not only those of us in the White House press corps did that, but others in the rest of the landscape of the media did that.

If there wasn't a debate in this country, then maybe the American people should think about, why not? Where was Congress? Where was the House? Where was the Senate? Where was public opinion about the war? What did the former president believe about the pre-war intelligence? He agreed that—in fact, Bill Clinton agreed that Saddam had WMD.

The right questions were asked. I think there‘s a lot of critics—and I guess we can count Scott McClellan as one—who thinks that, if we did not debate the president, debate the policy in our role as journalists, if we did not stand up and say, this is bogus, and you‘re a liar, and why are you doing this, that we didn‘t do our job. And I respectfully disagree. It‘s not our role.

As Greenwald and others have noted, some reporters were doing more than reprinting the administration's dire warnings and fear mongering talking points. Take for example the McClatchy organization, whose excellent reporting before the war demonstrated the hollowness and outright falseness of the administrations justifications for war. I guess Rutten of the LA Times must find it hard to understand how they could have gotten the story right. I guess they were just acting "mindlessly adversarial."