Begin forwarded message:
From: "Sardar" <[EMAIL PROTECTED]>
Date: September 16, 2008 1:57:40 PM PDT
To: "Sardar" <[EMAIL PROTECTED]>
Subject: The Corruption Inside Fannie Mae by Byron York - Article
written September 9, 2008
----- Original Message -----
Sent: Tuesday, September 16, 2008 1:54 AM
Subject: The Corruption Inside Fannie Mae by Byron York - Article
written September 9, 2008
Franklin Raines, Jamie Gorelick, Sampath Rajappa (head of the Office
of Auditing to his accounting team) as well as others connected to
their corruption at Fannie Mae
NEED TO GO TO PRISON!
( Please note that this article was written on September 9, 2008.
Quite a lot has happened to Fannie Mae and Freddie Mac since this
article was written.)
September 09, 2008, 5:30 a.m.
Politics and the Fannie Mae Piggy Bank
Franklin Raines, Jamie Gorelick, and some very cooked books.
By Byron York
Editor’s note — The impending federal bailout of Fannie Mae and
Freddie Mac has shed light not only on the seriousness of current
housing market conditions but also on the mismanagement and corruption
that helped cripple the mortgage giants. Although political figures
from both parties have profited mightily from Fannie Mae, it has been
a particular favorite of former officials of Democratic
administrations, as NR’s Byron York found out when he looked into the
situation in the summer of 2006.
On May 23, 2006, as a jury in Houston deliberated the case against top
Enron executives Kenneth Lay and Jeffrey Skilling, a little-known
regulatory agency in Washington, the Office of Federal Housing
Enterprise Oversight (OFHEO), released a study with the dryly
bureaucratic title “Report of the Special Examination of Fannie Mae.”
The document received far less attention than the news from Enron, but
its conclusions were stunning. In meticulous detail, it outlined a
culture of corruption at the Federal National Mortgage Association —
better known as Fannie Mae — that rivals the most serious corporate
scandals in recent years. In this case, however, the main players are
Washington insiders — some of them prominent veterans of the Clinton
administration — and the scandal’s effects could ripple through
Congress for years.
Fannie Mae is the biggest single source of money for mortgages in the
United States. From 1998 to 2004, the years covered by the OFHEO
investigation, it was headed by former Clinton budget director
Franklin Raines, whose top management team included former Clinton
Justice Department official Jamie Gorelick, sometimes mentioned as a
future attorney general in a Democratic administration. During that
period, the report says, Raines and his team grossly overstated Fannie
Mae’s earnings — to the tune of $10.6 billion — for the purpose of
paying themselves big bonuses. “By deliberately and intentionally
manipulating accounting to hit earnings targets,” the report says,
“senior management maximized the bonuses and other executive
compensation they received, at the expense of shareholders.”
In doing so, the report says, Raines and his team steered Fannie Mae
far afield from its original mission, transforming it from a stable
business into a risky one. Fannie Mae has its roots in the New Deal,
when it was established to increase the amount of money available for
mortgages. Over the years, its main business has been to issue debt
and then use the proceeds to buy mortgages from lenders, allowing
those lenders to give out new mortgages. Originally a government
agency, Fannie Mae went private in 1968, with the goal of “increasing
the availability and affordability of homeownership for low-,
moderate-, and middle-income Americans,” according to its mission
statement.
But Fannie Mae is not just any private institution. It is
congressionally chartered, meaning its existence is established in
law, it does not have to pay state and local income taxes, and it is
not subject to bankruptcy laws. It can borrow money at a lower rate
than anyone else except the federal government itself. Given all that,
there is a public perception that Fannie Mae is a rock-solid
government institution. “There is an implied guarantee,” says Sen.
John Sununu, a member of the Senate Banking, Housing, and Urban
Affairs Committee who has sponsored legislation to reform Fannie Mae.
“Investors think they are the next best thing to Treasuries.”
There’s no doubt that Fannie Mae succeeded in its original mission of
increasing the amount of money available for mortgages. In the 1980s,
it went a step further, essentially creating a new product when it
bought up mortgages and bundled them for sale to investors as mortgage-
backed securities. It was an extraordinarily profitable move for
Fannie Mae, and good for the housing market, too.
But in the 1990s, the company moved in a much riskier direction.
Fannie Mae used its borrowing power to buy up mortgages and hold them,
making a profit from the difference between the low price it paid to
borrow the money and the higher interest rate it received on the
mortgage. It was potentially profitable, but it had nothing to do with
helping low- and middle-income people buy houses. “It doesn’t do
anything to support their core mission,” says Senator Sununu, “and it
increases their exposure to interest-rate risks.”
But the OFHEO report suggests that none of that mattered to Raines,
who had been a top official at Fannie Mae in the early 1990s before
leaving to join the Clinton administration and then returning to
Fannie Mae as chief executive in 1998. According to the report, Raines
became obsessed with propping up Fannie Mae’s earnings per share, or
EPS, even if he had to use creative accounting to make it happen.
Raines set a series of increasingly higher EPS goals that, if met,
would trigger bonuses for the executive team that far surpassed what
they received in salary.
In 1999, Raines announced a new goal to double Fannie Mae’s EPS in
five years, from $3.23 per share to $6.46. It was an audacious goal,
and reaching it, according to OFHEO, became Fannie Mae’s reason for
existence: “$6.46, the EPS goal, became the corporate mantra —
everything else was secondary to hitting that target.” To convey an
idea of just how obsessedRaines had become, and how he passed on that
obsession to his top managers, the OFHEO report quotes at some length
from a speech given in 2000 by Sampath Rajappa, head of the Office of
Auditing, to his accounting team:
By now every one of you must have 6.46 branded in your brains. You
must be able to say it in your sleep, you must be able to recite it
forwards and backwards, you must have a raging fire in your belly that
burns away all doubts, you must live, breathe and dream 6.46, you must
be obsessed on 6.46. . . . After all, thanks to Frank, we all have a
lot of money riding on it. . . . We must do this with a fiery
determination, not on some days, not on most days but day in and day
out, give it your best, not 50%, not 75%, not 100%, but 150%.
Remember, Frank has given us an opportunity to earn not just our
salaries, benefits, raises . . . but substantially over and above if
we make 6.46.
So it is our moral obligation to give well above our 100% and if we do
this, we would have made tangible contributions to Frank’s goals.
It worked. Fannie Mae met its EPS goals, and Raines rewarded his top
executives — and most of all himself — with unheard-of amounts of money.
Even though his salary never topped $1 million, Raines’s total
compensation shot from $6.48 million in 1998 to $8.52 million in 1999,
to $13.89 million in 2000, to $18.86 million in 2001, to $18.20
million in 2002, to $24.15 million in 2003, all on the strength of EPS
bonuses. Investigators found that of the $90.12 million Raines was
paid in that six-year period, more than $52 million came from EPS
bonuses.
Gorelick’s situation was similar. OFHEO found that she took home
$26.46 million in the period from 1998 to 2002 (she left in that year,
so she wasn’t there for the entire period under investigation). Of
that figure, nearly $15 million came from EPS bonuses.
Of course, it wasn’t legit. “Fannie Mae reported extremely smooth
profit growth and hit announced targets for earnings per share
precisely each quarter,” the OFHEO report says.“Those achievements
were illusions deliberately and systematically created by [Fannie
Mae’s] senior management with the aid of inappropriate accounting and
improper earnings management.”
In other words, they cooked the books. And to make matters worse,
according to OFHEO, when regulators began to catch on to what was
happening, Raines and his team then “sought to interfere” with the
OFHEO investigation by trying to get Congress to start up a separate
probe of OFHEO. Fannie Mae also lobbied Congress to cut OFHEO’s funds
unless it got rid of the top official in charge of investigating
Fannie Mae.
That didn’t work, and, as a result of the investigation, Fannie Mae
has agreed to pay $400 million in penalties. The company is now under
criminal investigation by the Justice Department, and will likely be
in trouble with the Securities and Exchange Commission, too. And there
probably won’t be much more talk about Gorelick as attorney general
should a Democrat win the White House in 2008.
But there still is the matter of cleaning up Fannie Mae. Senator
Sununu and his colleagues on the Senate banking committee have been
trying for two years to win approval of a bill that would create a new
regulatory body for Fannie Mae and give that body the authority to
crack down on the company’s riskier practices.
But the bill has faced a lot of opposition, mostly from Democrats.
When Raines was still at Fannie Mae (he was forced out in 2004), he
tried, in Sununu’s words, “to slow-walk the process. Frank Raines
decided they were stronger and better and smarter than everyone else,
so they would push back.” Democrats allied themselves with Raines and
said they worried that reform might harm Fannie Mae’s ability to
provide mortgages to low- and middle-income homebuyers. Sununu’s bill
was approved in the banking committee last year, but only on a
straight party-line vote.
Now, however, there is the OFHEO report, which will probably make it
impossible for anyone to oppose reforming Fannie Mae. “It’s not a very
smart move politically to stand up and defend people who manipulate
earnings to get $50 million bonuses,” says Sununu.
So look for reform to happen, with the support of Republicans and
Democrats. It took a long time, and $10.6 billion in overstated
earnings, and a scathing report from regulators, but things are
finally moving along.
—
Byron York, NR’s White House correspondent, is the author of the book
The Vast Left Wing Conspiracy: The Untold Story of How Democratic
Operatives, Eccentric Billionaires, Liberal Activists, and Assorted
Celebrities Tried to Bring Down a President — and Why They’ll Try Even
Harder Next Time.
Article Source:
http://article.nationalreview.com/print/?q=NDA4YTY1N2ZhMDhmNjIwNTk4OTI2MDYxZWU4NDg1Y2Q=
Tinyurl Link:
http://tinyurl.com/55e4nu
No virus found in this incoming message.
Checked by AVG - http://www.avg.com
Version: 8.0.169 / Virus Database: 270.6.21/1674 - Release Date:
9/16/2008 8:15 AM
