Sunday, September 7, 2008

Exposing Fannie Mae and Freddie Mac - Corruption

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video for this posting can be found at:

There are probably few institutions in the United States that are as corrupt as Fannie Mae and Freddie Mac. Both are dumping grounds for political hacks from the major political parties and their Wall Street cronies (Wall Street firms do a considerable business in selling Fannie and Freddie's bonds). Powerful lobbyists from all points on the political spectrum are on their payrolls. Ex-congressman are known to get lucrative consulting contracts with them. And all of this is subsidized by the U.S. taxpayer.

The government support provided to Fannie and Freddie is supposed to be used to expand home ownership for lower income Americans. Not much of it winds up being spent of that purpose however. Instead, it has been estimated that at least 50% of their government subsidies, go to pay for dividends for their stockholders and to pay inflated bonuses for their top management. Both Fannie and Freddie had major accounting scandals in the early 2000s. Fannie alone had to spend a billion dollars for the audits to redo its books. The audits and other investigations showed that Fannie and Freddie purposely altered earnings to increase the amount of executive bonuses. They also indicated that Fannie and Freddie's operations were permeated with fraud and mismanagement. It was found that they overvalued assets, under reported losses, falsified signatures on accounting records, changed earnings records in their databases, misclassified securities on the books, and misused tax credits. Furthermore, it was revealed that they didn’t use generally accepted accounting principle (GAAP) to determine their earnings.

Government subsidies also went to pay for the $200 million in 'lobbying activities' that Fannie and Freddie spent in a several year period. This taxpayer supported lobbying was used to pervert the American political process. When Representative Cliff Stearns held a hearing investigating Fannie and Freddie and announced he would be holding more in the future, jurisdiction was promptly removed from his house committee. It was given to the apparently more compliant Mike Oxley, who then benefited from 19 political fundraisers sponsored by Fannie. When Representative Paul Ryan held town hall meetings in his district criticizing Fannie, Fannie subsequently called all mortgage holders in his district making false claims about his positions. He got into a lot of trouble with his constituents as a result. Perhaps ever more outrageous, when the head of OFHEO (the government appointed regulator for Fannie and Freddie) issued a report in 2003 indicating that the excess leverage that Fannie and Freddie used could prove to be financially calamitous (something that is now proving to be true), he was soon thereafter fired by the Bush administration. It was quite obvious at that point, that anyone who attempted to put any control whatsoever on Fannie or Freddie would promptly be gotten out of the way.

Where was the American media when all of this was taken place? Generally, they had been intimidated into silence. When the Wall Street Journal did an expose on Fannie and Freddie's operations in the early 2000s, they received a slew of ongoing condemnation from Wall Street and Washington. Even they seemed surprised by the extent that the politically powerful and well-healed benefited from the Fannie and Freddie tax-supported gravy train. It seemed that there were few people that Fannie and Freddie wouldn't attempt to bribe and no one that was too powerful that they wouldn't attempt to silence.

NEXT: Exposing Fannie Mae and Freddie Mac - The Subprime Crisis

Daryl Montgomery
Organizer New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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