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."
Jerks, Congress, Economy Meltdown