Just Look How They Were Duped By FNMA....

McCain's economic advisors¹, drawn from the American Enterprise Institute, seem to be pushing a "poor little rich guys" line, where the entire present fiscal crisis was foisted upon wide-eyed innocents at the nation's financial institutions by evil executives at Fannie Mae and Freddie Mac. (And oh, were they innocent.) Let's not understate the FNMA/FDMC role, or the bipartisan failure of Congressional oversight, but c'mon.

CJR brings us some of the allegations made against major players in the mortgage industry, in quiz form.

I believe my former colleagues, in rushing into such high-concept fare, have underplayed a good story. Sure, we have an idea that bad practices occurred, along with bad judgment, but do we really know the sweep of it all? Since it’s just us business reporters here—just us chickens—let me illustrate what I mean with a quiz. Match the allegation with the institution. Answers are at the end of the piece.

Allegation

1. Handed out copies of the movie Boiler Room as a training tape

2. Partnered to sell its “PayOption Arms” with a brokerage owned by a five-time felon, whose convictions included gun-related charges

3. Forbade loan officers to check borrower income on certain loans

4. Ran an “art department” in its Tampa office, where documents were altered

5. Settled allegations of institutionalized marketing deception that covered two million customers

6. Developed “FastQual,” a program designed to approve borrowers in twelve seconds

7. Incentivized brokers and loan officers through “yield spread premiums” and other compensation schemes to put borrowers into more expensive loans

8. Tapped two kegs of beer at weekly staff meetings

Institution

A. Citigroup

B. Countrywide

C. Ameriquest

D. IndyMac

E. Merit Financial

F. New Century

G. All of the above

This is not a take-home exam. If you don’t get more than two of seven, I think we have work to do.

Click through and read (or scroll) to the bottom for the answers.
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1. McCain Senior Economic Advisor Kevin Hasset's breathless, sensational headline, "How the Democrats Created the Financial Crisis", has been parroted throughout much of the right-wing blogosphere, his argument (while remaining the display of partisanship you would expect from an active McCain advisor) suggests broader Congressional responsibility. Curiously, a mere six months ago, he wasn't so sure we were even in a bubble and argued that the primary cause of any inflation in home values was excessive land use regulation. In the interim he was arguing that protecting polar bears would bring us $200/bbl oil, and presumably was whispering, "The fundamentals of our economy are strong" in McCain's ear.

McCain Advisor Peter Wallison can point to a better track record on FNMA/FDMC, and is a bit more circumspect in his headline, even if he tries to distract his readers from a bipartisan history of Congressional and regulatory failure, and overstate the role of FNMA/FDMC.

Fannie Mae - Then and Now

Then (Wall Street's Favorite Girl, Time Magazine, Dec. 7, 1970):

Speculators have been intrigued largely because Fannie Mae's quasi-governmental status exempts it from all the regulations of the Securities and Exchange Commission. Alone among the 1,325 common issues on the Big Board, Fannie Mae shares can be bought with only a 20% down payment, compared with the usual 65% margin for other stocks.

Why does Fannie Mae have this unique position? As a Government agency, created in 1938, it had little difficulty raising money for its mortgage loans on the private market; but all of these borrowed funds went on the Treasury's books as red ink, swelling the federal deficit. So Fannie Mae became a private corporation in 1968, and last May control of its board of directors passed into the hands of its 7,300 private stockholders. Nevertheless, Fannie Mae remains by law a "corporate instrumentality of the U.S.," and many crucial decisions concerning its borrowing, dividends and other matters are subject to approval by George Romney, Secretary of Housing and Urban Development. With $15.5 billion in assets, Fannie Mae ranks as the nation's eighth largest company.

* * *

Former Fannie Mae President Raymond Lapin, a prominent California Democrat who was ousted last year by President Nixon, concedes that the low margin requirement on the stock is "a weird arrangement." Still, Lapin maintains that Fannie Mae has become so vital to home building that "if it got into real trouble the Government would have to rush in and bail it out." Considering the increasing political importance of housing, Lapin is probably right. Compared with their chances for a quick killing, Fannie Mae stock speculators are exposed to minimal risk. At a time when Washington may be called on to impose stricter standards of behavior on the stock markets, it seems ironic that a loophole in the law has allowed a quasi-Governmental stock to become the most popular chip in the casino.

Now:

The Treasury Department late Friday was putting together final details of a plan to take the two into conservatorship, effectively a government takeover, at a potential cost of tens of billions to taxpayers.

* * *

Reports circulating Friday night have the two companies entering conservatorship, which would nearly wipe out equity holders but preserve the interests of debt holders. The chief executives of both companies would lose their jobs, but the companies could continue to operate, with quarterly infusions of capital from the Treasury depending on losses.

Any announcement would come just weeks before the two companies have to refinance $225 billion of mostly short-term notes. Fannie and Freddie sell debt to investors regularly, but concern about their financial position threatens to scare away those needed buyers, many of them foreign banks. A solid federal guarantee would allay investor fears and allow Fannie and Freddie to continue to raise funds as needed.