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Forget Daniel Mudd. Let’s Cross Examine Franklin Raines, Tim Howard, and James Johnson

Posted by Larry Doyle on April 9, 2010 4:19 PM |

Former CEO of Fannie Mae Daniel Mudd took the stand today to get grilled by the Financial Crisis Inquiry Commission. Ooooohhh, ahhhhh….what did we learn from Mr. Mudd? Very little. Although Mr. Mudd fed at the Fannie trough for a good number of years and was paid tens of millions of dollars during his tenure, the fact is he only took over the reins in what amounted to the bottom of the eighth inning.

If the Financial Crisis Inquiry Commission truly wanted to serve America’s interests, they would shine the bright lights on three former Fannie execs who cultivated a culture which, in my opinion and others, allowed for Fannie Mae to cook their books while effectively paying off their friends up on the Hill. Who are these execs?

Franklin Raines, James Johnson, and Tim Howard.

Each and every quarter during this trio’s tenure, I would witness Fannie Mae nail their expected earnings virtually to the penny. They received almost blanket coverage and support by their ‘friends in high places’ in and around Washington.

While Mr. Mudd was at the helm when Fannie went over the cliff, make no mistake the operation was out of control well before that. Let’s revisit a review provided by The New York Times during those fateful days in October 2008. The Times wrote, Pressured to Take More Risk Fannie Mae Reached Tipping Point:

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.

While Fannie may have built these risk systems, I will share with readers that based on personal experience their risk management in terms of interest rate and volatility risk was horrendous.

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.

While these executives were being paid handsomely, they spread the wealth around by showering massive campaign contributions and lobbying dollars all over Washington. Those dollars came in handy when accounting irregularities at Fannie were exposed. While Freddie Mac was underreporting revenues for a rainy day, Fannie was overreporting revenues. These execs should have been indicted and prosecuted for fraud. If they had, perhaps Mr. Mudd would not have continued Fannie’s path right over the cliff.

Where did Franklin Raines and Tim Howard end up? As The Times attested in 2008:

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.

In my opinion, there was real fraud embedded in this incest. Why doesn’t the Financial Crisis Inquiry Commission pursue it? Does it hit too close to home, that is Congress and the White House? How so? Recall that none other than James Johnson initially served on President Obama’s Vice-President search committee.


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