Chris Blankenship's Ramblings

While everyone in congress acts like the recent economic problems were unforeseen, it’s pretty clear that some people were trying to do something about it back in 2005.  Need proof?  Have a look at a couple of articles I dug up today…

FEDERAL HOUSING ENTERPRISE REGULATORY REFORM ACT OF 2005

Senator John McCain – May 25, 2006

“For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market.”

“OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.”

“The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.”

“If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.”

http://frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?dbname=2006_record&page=S5217&position=all

Testimony of Chairman Alan Greenspan

Regulatory reform of the government-sponsored enterprises
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate  – April 6, 2005

“On the other hand, if we fail to strengthen GSE regulation, we increase the possibility of insolvency and crisis.”

“As I concluded last year, the GSEs need a regulator with authority on a par with banking regulators, with a free hand to set appropriate capital standards, and with a clear and credible process sanctioned by the Congress for placing a GSE in receivership, where the conditions under which debt holders take losses are made clear.”

“Without restrictions on the size of GSE balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for homeownership.”

http://www.federalreserve.gov/boarddocs/testimony/2005/20050406/default.htm

The Fall of Fannie Mae

“What got the most attention, though, was OFHEO’s charge that in 1998, when an internal model said Fannie would need to recognize a roughly $400 million expense, Fannie only recognized $200 million. That, OFHEO charged, allowed the company to report earnings of $3.23 per share, which meant that Fannie paid out a total of about $27 million in bonuses. Both the SEC and Justice quickly announced their own investigations.”

“One of the few bad moments for Fannie came when Baker released information showing that over five years, Fannie had paid its 20 top executives a combined $245 million in bonuses. In 2002 its 21 top executives each earned more than $1 million in total compensation.”

“…the Securities and Exchange Commission ruled that Fannie Mae … had violated accounting rules, overstating profits by an estimated $9 billion since 2001, which represents almost 40% of its total earnings during that period. Raines, who was paid more than $90 million during his six years as CEO–much of it linked to meeting profit targets…”

http://money.cnn.com/magazines/fortune/fortune_archive/2005/01/24/8234040/index.htm