Loan Giant Overstated the Size of Its Capital Base

[kurth_]

Source: New York Times

September 7, 2008
Loan Giant Overstated the Size of Its Capital Base
By GRETCHEN MORGENSON and CHARLES DUHIGG

The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced on Sunday, came together after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.

The proposal to place both companies, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid. Falling home prices, which are expected to lead to more defaults among the mortgages held or guaranteed by Fannie and Freddie, contributed to the urgency, regulators said.

Investors who own the companies’ common and preferred stock will suffer. Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives of both companies will be pushed out, according to those briefed on the plan.

The cost of the government’s intervention could rise into tens of billions of dollars and will probably be among the most expensive rescues ever financed by taxpayers.



Read more: http://www.nytimes.com/2008/09/07/business/07fannie.html

---

Enron redux.

[progressivebydesign]

1. Gulp. As someone whose home purchase funds Monday -- I'm holding my breath.

Though no one has mentioned any effect that will have on borrowers, I'm waiting until our loan funds and those keys are in our hands on Tuesday, before I can breath again. I tell ya, with credit scores thru the roof, a good down payment and reserves, and no house to sell, it was STILL a total nightmare to get a mortgage this time.

I cannot believe how Bush/Cheney managed to fuck up the economy so badly. They NEVER should have gotten that second term. The Country would have had a chance if we could have gotten them out after 4 years. this is why it's the very survival of our Country and economy to get Obama/Biden in there.

[Purveyor]

3. The fact of the matter is...there is no money to lend to Joe Citizen. It is all going to

protect the fucking 'elite investors' and the foreign countries that have floated this 'ponzi scheme' for the last many years.

Worst yet, that money is being created out of 'thin air' or rather off the Fed Reserves printing presses. You think inflation is bad now...snug and tighten your seatbelts.

Stock your pantries, secure your own assets and 'hang the fuck on'. This is going to be one hell of a ride.

[MadMaddie]

2. Soooo

Can somebody tell me how this is different from "Cooking the Books"?

<snip>
Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion,
<snip>

This is criminal activity, this was no accident.

[TechBear_Seattle]

4. Accounting can be a very murky area

I still remember the first day of my first accounting class in college. The teacher told a story of two politicians running for the New York City Council. The incumbent took raw data and showed that a statute he authored had saved the city over $300,000. His opponent took the exact same raw data to show that the law had cost the city almost $50,000. Funny thing was that both candidates were correct; the difference came because both used different, but equally accepted, accounting techniques.

The crime of fraud requires proof of intent to defraud. Imaginative accounting practices, provided they are not used to defraud, is not a criminal act. The truth is that "standards of accounting practices" is a very wide open field. Overstating capital is a very, very common corporate practice, and unless it is done specifically to bilk investors or inflate the price of a company that is being sold, not illegal.

[Turbineguy]

5. They keep throwing around this 5 Trillion number

That's the amount if the portfolio goes to zero. In other words, the houses, all of them, will be given away free.

Taking over is a cheap alternative. Eventually, interest rates, taxes, currency value will have to balance this out. But in the grand scheme of things it will be a drop in the bucket and not be all that bad.

Consider that Bush leaving the Whitehouse will free up over $2 trillion per year in world-wide costs spent on war and excessive oil prices.

[BumRushDaShow]

6. Free markets, de-regulation, and government off our backs makes America great!

:sarcasm:

[psychmommy]

7. if enron was a monkey

this fannie mae and freddie mac seems to be king kong. we are gonna be paying for this forever so that china and other speculators can walk away unscathed, there was risk when they got into it and they want the american people to eat it. well i am full.

[Pale Blue Dot]

8. Does anyone think that Freddie and Fannie are the only ones?

The death spiral continues (and picks up speed).

[whistle]

9. I guess the Fannie Mae and Freddie Mac owners were expecting a blank check

...."Just make that $15.5 trillion check out to cash please" :wtf:

[Celebration]

10. preferred stock

CNBC was saying late last week that common stockholders would go down for sure, but that they had to protect preferred stockholders, because they are BANKS that are already in a precarious position. If the preferred stockholders are wiped out, then so are the bank reserves, which, by the way were net negative the last time I checked.

So, if they wipe out the preferred stockholders, and the CNBC people are correct, yikes!! Double yikes!!

[TankLV]

11. Privatize the Profits - Publicize the Risks - again!!!

They'd better make the CEO's PAY BACK their "unlimited" salaries FIRST that the repukes keep telling us we, as a society, must NEVER LIMIT!!!

These THIEVES better be made to walk away with absolutely NOTHING in the form of either COMPENSATION or ANY form of RETIREMENT for ALL their years of MISMANAGEMENT...

And as for any "shareholders" (OWNERS) well - since almost ALL of my retirement funds are either worth NOTHING or have lost THOUSANDS, then they better be damn sure they get NOTHING, too...

obama has been hitting this theme really well this weekend...

and, to answer the trolls who will show up - YOU BET THIS IS "CLASS WARFARE" - because we're NOT gonna take it anymore, and we'll be DAMNED if we're gonna let the RICH walk all over us AGAIN...

[LatteLibertine]

12. Remember

It's all about pseudo capitalism. Socialism is fine as long as it is the Wall Street variety. Welfare is great too as long as it is for corporations. Tax is acceptable as long as it's black :p

It must be nice being part of a company that takes a 2.1 billion dollar loss in a year yet you get a 7% pay increase.

[UpInArms]

13. Freddie Mac CEO made $20 million last year

http://blownmortgage.com/2008/07/19/freddie-mac-ceo-made-20-million-last-year/

Dick Syron, Freddie Mac chairman and CEO took home nearly $20 million last year and can take home another $20 million this year reports the Associated Press. This for the man that has guided Freddie Mac’s stock to it’s lowest point since 1991 and presided over a $3 billion net loss for the company in 2007.

This is obscene. How do these people who are supposed to be leaders get rewarded for driving these companies straight in to conservatorship? If the government does take over Fannie and Freddie it must come with pay controls for executives of these companies. The American taxpayer doesn’t deserve to pick up the tab of the mortgage mess, but if they are forced to they certainly shouldn’t pick up ridiculous salaries of non-performing executives.

From CNN:

Freddie Mac Chairman and Chief Executive Richard Syron pocketed nearly $19.8 million in compensation last year, according to a Securities and Exchange Commission filing Friday, even though the mortgage company’s stock lost half its value in 2007.

If Syron stays at the helm of Freddie Mac (FRE, Fortune 500) through the end of next year, he will receive nearly $20 million in stock awards if the board says he has met certain goals. This year, he is guaranteed to get $8.8 million in stock grants regardless of performance.

For 2007, Syron received a $1.2 million salary, a $3.45 million bonus, including $1.25 million to remain at the company, and $771,585 in other compensation. He also received stock and options valued by the company at $14.3 million at the time they were awarded.

The company last year picked up the tab for Syron’s financial planning expenses, car and driver for commuting, home security system, business-related dining and travel costs for his wife and $100,000 in legal fees from negotiating his employment contract.

[UpInArms]

14. the compensation former CEO Franklin Raines and former CFO J. Timothy Howard will be receiving

http://www.mortgagenewsdaily.com/12292004_Fannie_Mae_Executives_Forced_Out.asp

excerpt:

Among other Fannie Mae news stories the past few days is one about the compensation former CEO Franklin Raines and former CFO J. Timothy Howard will be receiving after they were forced out of their jobs last week by Fannie Mae's Board of Directors under pressure from the Office of Federal Housing Enterprise Oversight (OFHEO).

Fannie Mae, in a Form 8-K filing with the Security and Exchange Commission on December 27, outlined the compensation packages to which the two are entitled. While referring to Mr. Raines' "retirement" the filing states that, should the company pay bonuses for 2004 under its Annual Incentive Plan, that Mr. Raines will be entitled to consideration for a pro-rata share. Mr. Howard will be entitled for consideration for both 2004 and 2005.

Mr. Raines will receive monthly payments of $114,393 from the corporation's pension plan for the rest of his and his surviving spouse's life and, if he is allowed to make his retirement effective in June, 2005 as he has requested rather than immediately, that pension amount would rise to $116,300. Mr. Howard will receive estimated monthly payments of $36,071 from the plan. In addition, both men will receive lifetime medical and dental coverage for themselves, their wives, and any dependents under age 21 and corporation paid premiums on substantial life insurance policies. Mr. Raines' medical insurance premiums will be paid; Mr. Howard will have to pay at the reduced rates provided to all retirees.

In addition, as of the date his resignation was requested, Mr. Raines held vested and exercisable options to purchase a total of 1,628,071 shares of Fannie Mae common stock. The option price was exceeded by actual stock value by $5,545,270. In addition, Mr. Raines' "retirement" triggered an addition package of options to purchase some 380,000 shares at varying prices. The options are vested and will expire between May 2008 and January 2014. He may also be entitled to receive additional shares under the corporation's Performance Share Program but no firm value figures were available.

Mr. Howard holds vested options that, if exercised immediately, would reap $4,395,864. Because Mr. Howard resigned, he will receive no further options nor will any additional options he already holds vest after January 31, 2005.

Mr. Howard is contesting the definition of his resignation and if successful, will receive his salary through June 30, 2007. This would result in additional payments of $1.7 million and continued free medical and dental coverage.

OFHEO has announced that it is reviewing the severance packages awarded to the two executives and there is a possibility that they may seek to have them formally terminated. This would prevent them from collecting any severance payments at all.

...more...

[TankLV]

15. This is OUTRAGEOUS! OUTRAGEOUS!!!!!

They should FORFEIT ALL compensation - past and FUTURE!!!

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