I don't know the details of this case, but (1) the DP was part of the process of deregulation, perhaps as a passive partner to the GOP; and (2) Fannie and Freddie are renowned for being DP strongholds.
On Sat, Oct 4, 2008 at 6:15 PM, michael perelman <[EMAIL PROTECTED]> wrote: > The New York Times has an interesting article about the way that the > subprime mortgage industry pressured Fannie Mae into approving questionable > loans. The article has 2 throw-away lines giving the Democrats some > responsibility. Is there anything to this accusation? > > Duhigg, Charles. 2008. "Pressured to Take More Risk, Fannie Hit a Tipping > Point." New York Times (5 October). > http://www.nytimes.com/2008/10/05/business/05fannie.html?_r=1&hp=&oref=slogin&pagewanted=print > > Here are the two points in question: > > Congress was demanding that Mr. Mudd help steer more loans to low-income > borrowers. > > Capitol Hill bore down on Mr. Mudd as well. The same year he took the top > position, regulators sharply increased Fannie's affordable-housing goals. > Democratic lawmakers demanded that the company buy more loans that had been > made to low-income and minority homebuyers. > > "When homes are doubling in price in every six years and incomes are > increasing by a mere one percent per year, Fannie's mission is of paramount > importance," Senator Jack Reed > <http://topics.nytimes.com/top/reference/timestopics/people/r/jack_reed/index.html?inline=nyt-per>, > a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in > 2006. "In fact, Fannie and Freddie can do more, a lot more." > > Here is the entire text: > > "Almost no one expected what was coming. It's not fair to blame us for not > predicting the unthinkable."— Daniel H. Mudd, former chief executive, Fannie > Mae > <http://topics.nytimes.com/top/news/business/companies/fannie_mae/index.html?inline=nyt-org> > > When the mortgage giant Fannie Mae recruited Daniel H. Mudd, he told a > friend he wanted to work for an altruistic business. Already a decorated > marine and a successful executive, he wanted to be a role model to his four > children — just as his father, the television journalist Roger Mudd, had > been to him. > > Fannie, a government-sponsored company, had long helped Americans get > cheaper home loans by serving as a powerful middleman, buying mortgages from > lenders and banks and then holding or reselling them to Wall Street > investors. This allowed banks to make even more loans — expanding the pool > of homeowners and permitting Fannie to ring up handsome profits along the > way. > > But by the time Mr. Mudd became Fannie's chief executive in 2004, his > company was under siege. Competitors were snatching lucrative parts of its > business. Congress was demanding that Mr. Mudd help steer more loans to > low-income borrowers. Lenders were threatening to sell directly to Wall > Street unless Fannie bought a bigger chunk of their riskiest loans. > > So Mr. Mudd made a fateful choice. Disregarding warnings from his managers > that lenders were making too many loans that would never be repaid, he > steered Fannie into more treacherous corners of the mortgage market, > according to executives. > > For a time, that decision proved profitable. In the end, it nearly destroyed > the company and threatened to drag down the housing market and the economy. > > Dozens of interviews, most from people who requested anonymity to avoid > legal repercussions, offer an inside account of the critical juncture when > Fannie Mae's new chief executive, under pressure from Wall Street firms, > Congress and company shareholders, took additional risks that pushed his > company, and, in turn, a large part of the nation's financial health, to the > brink. > > Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion > in loans to risky borrowers — more than three times as much as in all its > earlier years combined, according to company filings and industry data. > > "We didn't really know what we were buying," said Marc Gott, a former > director in Fannie's loan servicing department. "This system was designed > for plain vanilla loans, and we were trying to push chocolate sundaes > through the gears." > > Last month, the White House was forced to orchestrate a $200 billion rescue > of Fannie and its corporate cousin, Freddie Mac > <http://topics.nytimes.com/top/news/business/companies/freddie_mac/index.html?inline=nyt-org>. > On Sept. 26, the companies disclosed that federal prosecutors and the > Securities and Exchange Commission were investigating potential accounting > and governance problems. > > Mr. Mudd said in an interview that he responded as best he could given the > company's challenges, and worked to balance risks prudently. > > "Fannie Mae faced the danger that the market would pass us by," he said. "We > were afraid that lenders would be selling products we weren't buying and > Congress would feel like we weren't fulfilling our mission. The market was > changing, and it's our job to buy loans, so we had to change as well." > > Dealing With Risk > > When Mr. Mudd arrived at Fannie eight years ago, it was beginning a dramatic > expansion that, at its peak, had it buying 40 percent of all domestic > mortgages. > > Just two decades earlier, Fannie had been on the brink of bankruptcy. But > chief executives like Franklin D. Raines > <http://topics.nytimes.com/top/reference/timestopics/people/r/franklin_d_raines/index.html?inline=nyt-per> > and the chief financial officer J. Timothy Howard built it into a financial > juggernaut by aiming at new markets. > > Fannie never actually made loans. It was essentially a mortgage insurance > company, buying mortgages, keeping some but reselling most to investors and, > for a fee, promising to pay off a loan if the borrower defaulted. The only > real danger was that the company might guarantee questionable mortgages and > lose out when large numbers of borrowers walked away from their obligations. > > So Fannie constructed a vast network of computer programs and mathematical > formulas that analyzed its millions of daily transactions and ranked > borrowers according to their risk. > > Those computer programs seemingly turned Fannie into a divining rod, capable > of separating pools of similar-seeming borrowers into safe and risky bets. > The riskier the loan, the more Fannie charged to handle it. In theory, those > high fees would offset any losses. > > With that self-assurance, the company announced in 2000 that it would buy $2 > trillion in loans from low-income, minority and risky borrowers by 2010. > > All this helped supercharge Fannie's stock price and rewarded top executives > with tens of millions of dollars. Mr. Raines received about $90 million > between 1998 and 2004, while Mr. Howard was paid about $30.8 million, > according to regulators. Mr. Mudd collected more than $10 million in his > first four years at Fannie. > > Whenever competitors asked Congress to rein in the company, lawmakers were > besieged with letters and phone calls from angry constituents, some > orchestrated by Fannie itself. One automated phone call warned voters: "Your > congressman is trying to make mortgages more expensive. Ask him why he > opposes the American dream of home ownership." > > The ripple effect of Fannie's plunge into riskier lending was profound. > Fannie's stamp of approval made shunned borrowers and complex loans more > acceptable to other lenders, particularly small and less sophisticated > banks. > > Between 2001 and 2004, the overall subprime mortgage market — loans to the > riskiest borrowers — grew from $160 billion to $540 billion, according to > Inside Mortgage Finance, a trade publication. Communities were inundated > with billboards and fliers from subprime companies offering to help almost > anyone buy a home. > > Within a few years of Mr. Mudd's arrival, Fannie was the most powerful > mortgage company on earth. > > Then it began to crumble. > > Regulators, spurred by the revelation of a wide-ranging accounting fraud at > Freddie, began scrutinizing Fannie's books. In 2004 they accused Fannie of > fraudulently concealing expenses to make its profits look bigger. > > Mr. Howard and Mr. Raines resigned. Mr. Mudd was quickly promoted to the top > spot. > > But the company he inherited was becoming a shadow of its former self. > > 'You Need Us' > > Shortly after he became chief executive, Mr. Mudd traveled to the California > offices of Angelo R. Mozilo > <http://topics.nytimes.com/top/reference/timestopics/people/m/angelo_r_mozilo/index.html?inline=nyt-per>, > the head of Countrywide Financial, then the nation's largest mortgage > lender. Fannie had a longstanding and lucrative relationship with > Countrywide, which sold more loans to Fannie than anyone else. > > But at that meeting, Mr. Mozilo, a butcher's son who had almost > single-handedly built Countrywide into a financial powerhouse, threatened to > upend their partnership unless Fannie started buying Countrywide's riskier > loans. > > Mr. Mozilo, who did not return telephone calls seeking comment, told Mr. > Mudd that Countrywide had other options. For example, Wall Street had > recently jumped into the market for risky mortgages. Firms like Bear Stearns > <http://topics.nytimes.com/top/news/business/companies/bear_stearns_companies/index.html?inline=nyt-org>, > Lehman Brothers > <http://topics.nytimes.com/top/news/business/companies/lehman_brothers_holdings_inc/index.html?inline=nyt-org> > and Goldman Sachs > <http://topics.nytimes.com/top/news/business/companies/goldman_sachs_group_inc/index.html?inline=nyt-org> > had started bundling home loans and selling them to investors — bypassing > Fannie and dealing with Countrywide directly. > > "You're becoming irrelevant," Mr. Mozilo told Mr. Mudd, according to two > people with knowledge of the meeting who requested anonymity because the > talks were confidential. In the previous year, Fannie had already lost 56 > percent of its loan-reselling business to Wall Street and other competitors. > > "You need us more than we need you," Mr. Mozilo said, "and if you don't take > these loans, you'll find you can lose much more." > > Then Mr. Mozilo offered everyone a breath mint. > > Investors were also pressuring Mr. Mudd to take greater risks. > > On one occasion, a hedge fund manager telephoned a senior Fannie executive > to complain that the company was not taking enough gambles in chasing > profits. > > "Are you stupid or blind?" the investor roared, according to someone who > heard the call, but requested anonymity. "Your job is to make me money!" > > Capitol Hill bore down on Mr. Mudd as well. The same year he took the top > position, regulators sharply increased Fannie's affordable-housing goals. > Democratic lawmakers demanded that the company buy more loans that had been > made to low-income and minority homebuyers. > > "When homes are doubling in price in every six years and incomes are > increasing by a mere one percent per year, Fannie's mission is of paramount > importance," Senator Jack Reed > <http://topics.nytimes.com/top/reference/timestopics/people/r/jack_reed/index.html?inline=nyt-per>, > a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in > 2006. "In fact, Fannie and Freddie can do more, a lot more." > > But Fannie's computer systems could not fully analyze many of the risky > loans that customers, investors and lawmakers wanted Mr. Mudd to buy. Many > of them — like balloon-rate mortgages or mortgages that did not require > paperwork — were so new that dangerous bets could not be identified, > according to company executives. > > Even so, Fannie began buying huge numbers of riskier loans. > > In one meeting, according to two people present, Mr. Mudd told employees to > "get aggressive on risk-taking, or get out of the company." > > In the interview, Mr. Mudd said he did not recall that conversation and that > he always stressed taking only prudent risks. > > Employees, however, say they got a different message. > > "Everybody understood that we were now buying loans that we would have > previously rejected, and that the models were telling us that we were > charging way too little," said a former senior Fannie executive. "But our > mandate was to stay relevant and to serve low-income borrowers. So that's > what we did." > > Between 2005 and 2007, the company's acquisitions of mortgages with down > payments of less than 10 percent almost tripled. As the market for risky > loans soared to $1 trillion, Fannie expanded in white-hot real estate areas > like California and Florida. > > For two years, Mr. Mudd operated without a permanent chief risk officer to > guard against unhealthy hazards. When Enrico Dallavecchia was hired for that > position in 2006, he told Mr. Mudd that the company should be charging more > to handle risky loans. > > In the following months to come, Mr. Dallavecchia warned that some markets > were becoming overheated and argued that a housing bubble had formed, > according to a person with knowledge of the conversations. But many of the > warnings were rebuffed. > > Mr. Mudd told Mr. Dallavecchia that the market, shareholders and Congress > all thought the companies should be taking more risks, not fewer, according > to a person who observed the conversation. "Who am I supposed to fight with > first?" Mr. Mudd asked. > > In the interview, Mr. Mudd said he never made those comments. Mr. > Dallavecchia was among those whom Mr. Mudd forced out of the company during > a reorganization in August. > > Mr. Mudd added that it was almost impossible during most of his tenure to > see trouble on the horizon, because Fannie interacts with lenders rather > than borrowers, which creates a delay in recognizing market conditions. > > He said Fannie sought to balance market demands prudently against internal > standards, that executives always sought to avoid unwise risks, and that > Fannie bought far fewer troublesome loans than many other financial > institutions. Mr. Mudd said he heeded many warnings from his executives and > that Fannie refused to buy many risky loans, regardless of outside pressures > . > > "You're dealing with massive amounts of information that flow in over > months," he said. "You almost never have an 'Oh, my God' moment. Even now, > most of the loans we bought are doing fine." > > But, of course, that moment of truth did arrive. In the middle of last year > it became clear that millions of borrowers would stop paying their > mortgages. For Fannie, this raised the terrifying prospect of paying > billions of dollars to honor its guarantees. > > Sustained by Government > > Had Fannie been a private entity, its comeuppance might have happened a year > ago. But the White House, Wall Street and Capitol Hill were more concerned > about the trillions of dollars in other loans that were poisoning financial > institutions and banks. > > Lawmakers, particularly Democrats, leaned on Fannie and Freddie to buy and > hold those troubled debts, hoping that removing them from the system would > help the economy recover. The companies, eager to regain market share and > buy what they thought were undervalued loans, rushed to comply. > > The White House also pitched in. James B. Lockhart, the chief regulator of > Fannie and Freddie, adjusted the companies' lending standards so they could > purchase as much as $40 billion in new subprime loans. Some in Congress > praised the move. > > "I'm not worried about Fannie and Freddie's health, I'm worried that they > won't do enough to help out the economy," the chairman of the House > Financial Services Committee, Barney Frank > <http://topics.nytimes.com/top/reference/timestopics/people/f/barney_frank/index.html?inline=nyt-per>, > Democrat of Massachusetts, said at the time. "That's why I've supported them > all these years — so that they can help at a time like this." > > But earlier this year, Treasury Secretary Henry M. Paulson Jr. > <http://topics.nytimes.com/top/reference/timestopics/people/p/henry_m_jr_paulson/index.html?inline=nyt-per> > grew concerned about Fannie's and Freddie's stability. He sent a deputy, > Robert K. Steel, a former colleague from his time at Goldman Sachs, to speak > with Mr. Mudd and his counterpart at Freddie. > > Mr. Steel's orders, according to several people, were to get commitments > from the companies to raise more money as a cushion against all the new > loans. But when he met with the firms, Mr. Steel made few demands and seemed > unfamiliar with Fannie's and Freddie's operations, according to someone who > attended the discussions. > > Rather than getting firm commitments, Mr. Steel struck handshake deals > without deadlines. > > That misstep would become obvious over the coming months. Although Fannie > raised $7.4 billion, Freddie never raised any additional money. > > Mr. Steel, who left the Treasury Department over the summer to head Wachovia > <http://topics.nytimes.com/top/news/business/companies/wachovia_corporation/index.html?inline=nyt-org> > bank, disputed that he had failed in his handling of the companies, and said > he was proud of his work . > > As the housing crisis worsened, Fannie and Freddie announced larger losses, > and shares continued falling. > > In July, Mr. Paulson asked Congress for authority to take over Fannie and > Freddie, though he said he hoped never to use it. "If you've got a bazooka > and people know you've got it, you may not have to take it out," he told > Congress. > > Mr. Mudd called Treasury weekly. He offered to resign, to replace his board, > to sell stock, and to raise debt. "We'll sign in blood anything you want," > he told a Treasury official, according to someone with knowledge of the > conversations. > > But, according to that person, Mr. Mudd told Treasury that those options > would work only if government officials publicly clarified whether they > intended to take over Fannie. Otherwise, potential investors would refuse to > buy the stock for fear of being wiped out. > > "There were other options on the table short of a takeover," Mr. Mudd said. > But as long as Treasury refused to disclose its goals, it was impossible for > the company to act, according to people close to Fannie. > > Then, last month, Mr. Mudd was instructed to report to Mr. Lockhart's > office. Mr. Paulson told Mr. Mudd that he could either agree to a takeover > or have one forced upon him. > > "This is the right thing to do for the economy," Mr. Paulson said, according > to two people with knowledge of the talks. "We can't take any more risks." > > Freddie was given the same message. Less than 48 hours later, Mr. Lockhart > and Mr. Paulson ended Fannie and Freddie's independence, with up to $200 > billion in taxpayer money to replenish the companies' coffers. > > The move failed to stanch a spreading panic in the financial world. In fact, > some analysts say, the takeover accelerated the hysteria by signaling that > no company, no matter how large, was strong enough to withstand the losses > stemming from troubled loans. > > Within weeks, Lehman Brothers was forced to declare bankruptcy, Merrill > Lynch > <http://topics.nytimes.com/top/news/business/companies/merrill_lynch_and_company/index.html?inline=nyt-org> > was pushed into the arms of Bank of America > <http://topics.nytimes.com/top/news/business/companies/bank_of_america_corporation/index.html?inline=nyt-org>, > and the government stepped in to bail out the insurance giant the American > International Group > <http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html?inline=nyt-org>. > > Today, Mr. Paulson is scrambling to carry out a $700 billion plan to bail > out the financial sector, while Mr. Lockhart effectively runs Fannie and > Freddie. > > Mr. Raines and Mr. Howard, who kept most of their millions, are living well. > Mr. Raines has improved his golf game. Mr. Howard divides his time between > large homes outside Washington and Cancun, Mexico, where his staff is > learning how to cook American meals. > > But Mr. Mudd, who lost millions of dollars as the company's stock declined > and had his severance revoked after the company was seized, often travels to > New York for job interviews. He recalled that one of his sons recently asked > him why he had been fired. > > "Sometimes things don't work out, no matter how hard you try," he replied. > > > > -- > > Michael Perelman > Economics Department > California State University > michael at ecst.csuchico.edu > Chico, CA 95929 > 530-898-5321 > fax 530-898-5901 > www.michaelperelman.wordpress.com > > > _______________________________________________ > pen-l mailing list > [email protected] > https://lists.csuchico.edu/mailman/listinfo/pen-l > -- Jim Devine / "Nobody told me there'd be days like these / Strange days indeed -- most peculiar, mama." -- JL. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
