Sense on Cents

Former Chairman and CEO of Fannie Mae, Franklin Raines

Whatever happened to the virtues of taking responsibility and ownership for issues? Why do I hold so many senior executives in our financial industry in disdain? For the very simple reason that I have seen very few of these execs stand up and be counted. All too many of them point the finger elsewhere, use the convenient excuse of ‘the perfect storm,’ or develop a convenient case of amnesia.

Who is a fine examplar of the last category? Former Chairman and CEO of Fannie Mae Franklin Raines who wrote into The Wall Street Journal yesterday on the topic of the demise of our two step-children, Fannie and Freddie. Raines promotes that the downfall of these organizations and the enormous burden they now put on American taxpayers were simply the result of the excessive credit risks taken by Freddie and Fannie from 2005-2007. Raines writes, Poor Credit Judgments Sank Fannie and Freddie:

The facts about the financial collapse of Fannie and Freddie are pretty clear and a matter of public record.

The company managers, their regulator and the Treasury have all said that the losses which crippled the companies were caused by the purchase of loans with lower credit standards between 2005 and 2007. The companies explicitly changed their credit standards in order to regain market share after Wall Street began to define market credit standards in 2004. As proved to be the case for most other investors in Alternative-A and sub-prime mortgages, this was a very bad idea.

So the companies said this, and we are supposed to believe them? Be mindful of the fact that company executives at both Fannie and Freddie have always been very closely aligned with the Washington power base both on and off the Hill. Regulators? Fannie and Freddie ran roughshod over their regulator who was ill-equipped to monitor their activities in the first place. Treasury? We’re supposed to take Tim and team at face value? Can you say “self-serving?”

So the cause of the financial problems for Fannie and Freddie was bad decisions, not their government sponsored status. Had the companies maintained their credit standards they would have fared much better. The same is true for Wall Street. Bad decisions, not bad government charters, caused the financial crisis.

The Journal had been warning for years that the on-balance sheet portfolios of Fannie and Freddie would lead to their demise. Mr. Carney suggests that excessive leverage was the culprit. Unfortunately, neither of these were involved. Nope. Just bad credit judgments. Decisions made, by the way, while operating under close regulatory scrutiny.

Do you detect a not so subtle haughty sense of condescending grandeur? I do. Yes, this from the very individual who ramped up Fannie’s internal investment portfolio and cooked the books while he did it. While Franklin incurred a hefty fine, the fact is his friends in Washington protected him. Given the accounting fraud at Fannie under his watch, I personally thought he was a strong candidate for time in the sin bin.

Perhaps one reason Congress and the administration are being careful before eliminating Fannie and Freddie is that they have noticed that Wall Street and the commercial banks have virtually abandoned the mortgage market leaving only Fannie, Freddie and the Federal Housing Administration to keep housing finance flowing. They may also be pondering just how the private-market players or any new entities created to replace Fannie and Freddie would be able to avoid bad credit decisions in the future.

Well, when entities such as Freddie and Fannie are provided blank checks to write off losses and then redistribute wealth, that is a tough model with which to compete. I say that with little regard for the banks, as well.

It seems reasonable to some of us that they think about those issues before acting.

Franklin D. Raines

Washington

Mr. Raines was chairman and CEO of Fannie Mae from 1999 to 2004.

Wow, what a set of balls. Perhaps Franklin has been getting too much sun or has been preoccupied with counting his money from his days laying the foundation for Fannie’s demise. The selective amnesia displayed in his letter is just another of the ‘in your face’ acts of cowardice seen all too often in our nation these days.

Franklin remains a charter member of the Sense on Cents Hall of Shame.

LD

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Sense on Cents/Franklin Raines

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