Who the hell are Fannie Mae and Freddie Mac? And why is the government bailing them out?
I'll admit it. My eyes used to glaze over when I heard about the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). But now that the government is bailing them out to the possible tune of $100 billion each, I realize this is important enough for the average citizen to understand, at least on a basic level.
So here's the quick break down. They are two private corporations that make loans and loan guarantees in the mortgage industry. They own or guarantee about half of the U.S. $12 trillion mortgage market. Over the past year, they have recorded combined losses of around $14 billion. They are responsible for more than 80% of new mortgages being made in 2008.
They were on the verge of bankruptcy, but that would be disastrous for the people of this country. So the government is bailing them out. At taxpayer expense.
Is privatization always the best idea? In the beginning, Fannie Mae and Freddie Mac were governmental entities. FDR initiated them in 1938 as part of The New Deal, and they operated as governmental offices for the next 30 years. Then in 1968 they went private. Yesterday, the government put them under conservatorship to keep them from going under.
Depending on your political point of view, you may say, "Pure capitalism is best. Keep government out of business. Government is big and wasteful. Leave it to the corporations to take care of things in this country."
Or you may say, "Government can be a vehicle for good. There is a place for the government in making our society better. Government is a net that can help us when things go bad."
So, are Fannie Mae and Freddie Mac having problems just because of the bad economy and sub-prime mortgage defaults? Look to the top. In 2006, the US regulators for the federal government accused Fannie Mae's CEO, CFO, and controller of manipulating Fannie Mae earnings to maximize their bonuses. Former CEO Franklin Raines, CFO J. Timothy Howard, and Controller Leanne G. Spencer denied the charges.
The government sued, seeking to recoup more than $115 million in bonus payments these three paid to themselves between 1998 and 2004. The government also sought about $100 million in penalties for their involvement in the accounting scandal.
In April a settlement was announced, allowing the three executives to pay fines totaling about $3 million, which will be paid by Fannie's insurance policies. Raines also agreed to donate the proceeds from the sale of $1.8 million of his Fannie stock and to give up stock options. The stock options however have no value. Raines also gave up an estimated $5.3 million of "other benefits" said to be related to his pension and foregone bonuses.
If you hear that the Fannie Mae and Freddie Mac bailout are simply due to the poor economy and risky "sub-prime" loans to people who shouldn't have qualified, don't believe it. The CEO and other corporate executives were sued for fudging the numbers and excessive self-dealing, but they walked away with a slap on the hand. Who knows how far the fraud actually went. Now the taxpayers (i.e. the government) are bailing out the private corporation by possibly paying $100 billion for each company. It's too soon to know how much the taxpayers ultimately will recover, if anything.
But the CEOs and corporate executives are still cashing in. The CEOs of Fannie Mae and Freddie Mac stand to collect millions of dollars in severance compensation, according to the New York Times. Fannie's Daniel Mudd could get $9.3 million in severance pay, retirement benefits and deferred compensation if his dismissal is "without cause," the consulting firm James F. Reda & Associates told the Times. And Freddie's Richard Syron could get a package valued at $14.1 million after a clause was added to his employment contract in mid-July, the Times reported.
Is there any accountability for the corporate big dogs? The current Republican Administration talks a lot about pure capitalism, but when it boils down to it, they use our government to bail out their corporate friends, who walk away with millions. At the taxpayers' expense.
Source: CNN Money.com, UPDATE: Fannie, Freddie Shares Plunge, But Bailout Sparks Broad Rally: http://money.cnn.com/news/newsfeeds/articles/djf500/200809081257DOWJONESDJONLINE000467_FORTUNE5.htm
Source: Fannie Mae: Wikipedia: http://en.wikipedia.org/wiki/Federal_National_Mortgage_Association
Source: Fox Business: CEOs Of Fannie And Freddie May Get Severance: N.Y. Times http://www.foxbusiness.com/story/markets/industries/finance/ceos-fannie-freddie-severance-ny-times/