Fannie Mae

Why Did The Treasury Hire Morgan Stanley?

Last week we learned that the Treasury Department, shortly after receiving authority to help shore up Fannie Mae and Freddie Mac, hired Morgan Stanley to advise it on the rescue plan. While the Treasury is only paying Morgan Stanley a $94,000 fee for the transaction, Morgan’s role here still raises serious questions. First and foremost: why was Morgan Stanley hired?
We hear that Treasury Department spoke with a variety of Wall Street firms to discuss the advisory role. Presumably, Morgan Stanley got the mandate because it was willing to give up certain market positions that would have created conflicts of interest with its advisory role. (Goldman, which thrives at the nexus of conflicted interest, probably wanted nothing to do with this.)
But the very idea of hiring a Wall Street firm to provide “market analysis and financial expertise” in connection with Fannie and Freddie is strange. No one on Wall Street has the requisite experience for reforming or rescuing government sponsored entities that are now explicitly backed by a bailout package. What’s more, the small size of the advisory fee and its structure provides no incentives for Morgan Stanley to provide advice that will keep Fannie and Freddie out of trouble in the future. Indeed, their client relationships and ties to the securitization and mortgage market may well create incentives for them to push Fannie and Freddie right back into the mortgage bubble inflating business.
We’re sure the people at Morgan Stanley, however, are bright enough and perhaps even honest enough to resist these incentives. But the first thing this deal obviously does is remove accountability for a future failure of Fannie or Freddie. Morgan Stanley’s low fee means that they probably can’t be penalized for giving bad advice. Politicians and regulators, the folks who ordinarily would be held accountable for the collapse of government sponsored entities, will be able to point to Morgan Stanley . In other words, everyone’s ass is covered.
This looks, in short, like a way to free Fannie and Freddie from oversight rather than to provide it. Government guarantees already have freed the companies from market oversight–they simply cannot fail. Now outsourcing the reform has largely freed them from political oversight. Fannie and Freddie may be more autonomous after all this is done than they ever have been before. And once Hank Paulson and his crew–who are genuinely pro-market skeptics with an appetite for reigning in Fannie and Freddie–have passed from the scene, the checks on them may well be removed.

Jim Johnson is out of there. The former chairman of Fannie Mae who received several preferential loans from Countrywide, has announced he’s leaving Barack Obama’s vice presidential search committee.
This is in keeping with the Obama campaigns new tactic of knee-capping supporters whose scandals distract from the campaign’s messages of hope and change. The operating principle (if not an actual campaign slogan) seems to be: No more Reverend Wrights!

Johnson Quits Obama’s Vice Presidential Search Team
[Bloomberg]

This morning we learned that the government seems to have learned exactly the wrong lesson from the recent turmoil in the credit markets. Government policies to expand homeownership—remember the once-vaunted “ownership society” that President George Bush and his friends thought would make us all more responsible capitalists?—helped produce irresponsible mortgage lending, which fueled the massive build-up of securitized credit products, which unbalanced the balance sheets of our financial institutions, which…stop us if you’ve heard this one before.
Oh, right. Of course you have. Anyway, now the regulators in charge of mortgage lenders Fannie Mae and Freddie Mac have decided that what these institutions really need are less stable balance sheets and more leverage. And so they’ve decided to loosen key capital requirements that have been restraining the mortgage companies. Fannie Mae may now increase its leverage to 33-1 from about 30-1.
The move is being hailed by some as providing some additional government-backed cushion for the credit crisis. Which only confirms the fact that in the minds of many the solution to the problem of debit is always more credit. Well, looks like we’re going to get it, good and hard.
Official Statement from Office of Federal Housing Enterprise Oversight [OFHEO.gov]
Fannie, Freddie Surplus Capital Requirement Is Eased [Bloomberg]
Fannie and Freddie Get a Little Room to Breathe [Market Movers]

Fannie Mae: Lips Blistered From The Subprime Crack Pipe?

It seems the #1 U.S. home finance company couldn’t resist the sweetfreebase-like appeal of subprime yields. After the bell on Tuesday, Fannie Mae announced plans to issue $7 billion in non-convertible preferred stock and to cut its dividend by 30%, due in part to market losses on the securities that it owns.
Perhaps Fannie was bored with their cutesy New Deal era mission tp “help those who house America”; apparently, they were buying “private-label” subprime debt from banks in the private sector.
Even though their subprime and Alt-A mortgage-backed bond holding represent a “small proportion” of their overall mortgage portfolio, their combined value is nearly double Fannie’s $40 billion of capital.
And it gets worse: According to the Fortune article, it seems that some of the securities that Fannie owns may be trading far below the 2% markdown that they applied in the third quarter. Future writedowns may be five times greater — or more — depending upon the securities involved. These include the aptly titled “liar loans”, where deadbeats can take advantage of low-disclosure requirements to borrow more than
they can afford to pay back.

Fannie Mae could face more losses
[Fortune]

fanniemae.jpg

The U.S. Office of Federal Housing Enterprise Oversight has filed a notice of charges against three former Fannie Mae executives, accusing them of misconduct and recklessness. Former chairman and CEO Franklin Raines, former vice chairman and CFO J. Timothy Howard, and former senior vice president and controller Leanne Spencer are named in the suit, which seeks restitution and civil money penalties.
OFHEO made the announcement on Monday and noted that its general counsel is continuing to review other employees of the mortgage giant, which has disclosed $7.9 billion in accounting errors stemming from its derivatives and hedging activities and has undergone a massive restatement process over the past few years.

Feds Charge Three Ex-Fannie Mae Execs [CFO.com]
*or what Howard calls “a work of unsubstantiated fiction.

Fannie Mae: Still A Different Kind of Company

Fannie Mae got hammered by the Office of Federal Housing Enterprise Oversight, which issued a 340-page report detailing the mortgage giant’s misdeeds and levied $400 million in fines.
“Our examination found an environment where the ends justified the means. There was a systematic effort by senior management to manipulate accounting, reap financial rewards and prevent the rest of the world from knowing about it,” said OFHEO Acting Director James B. Lockhart.

Read more »

Too Connected To Fail?

Today’s Wall Street Journal editoral page asks. “So what happens when a company that hasn’t filed a financial statement in a year and a half announces yesterday yet more accounting problems and puts off reporting any results until sometime in 2007?”
The answer?

“Its stock goes up 3% and its bonds rally too. At least, that’s what happens if the company is Fannie Mae and everyone believes it is Uncle Sam that will be left holding the bag if the mortgage giant blows up. Not only has Fannie’s stock remained remarkably buoyant through its epic accounting fiascoes, but earlier this year the New York Stock Exchange amended its rules on delisting, effectively giving Fannie Mae a get-out-of-jail-free card.”

The Fannie Exception [The Wall Street Journal]