Freddie's Risk Officer: CEO Ignored Warning Signs

Tuesday, August 05, 2008 | 09:00 AM

“He said we couldn’t afford to say no to anyone...”

-David A. Andrukonis, Freddie Mac’s former chief risk officer, about Freddie's CEO, Richard F. Syron

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A quick excerpt from today's must read article:

"The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others.

That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing questionable loans that threatened its financial health.

Today, Freddie Mac and the nation’s other major mortgage finance company, Fannie Mae, are in such perilous condition that the federal government has readied a taxpayer-financed bailout that could cost billions. Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Mr. Syron heightened those perils by ignoring repeated recommendations.

In an interview, Freddie Mac’s former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.”

Mr. Syron received a memo stating that the firm’s underwriting standards were becoming shoddier and that the company was becoming exposed to losses, according to Mr. Andrukonis and two others familiar with the document."

Astonishing . . . but here is  the money quote:

"Mr. Andrukonis was not the only cautionary voice at Freddie Mac at the time. According to many executives, Mr. Syron was also warned that the firm needed to expand its capital cushion, but instead that safety net shrank. Mr. Syron was told to slow the firm’s mortgage purchases. Instead, they accelerated.

Those and other choices initially paid off for Mr. Syron, who has collected more than $38 million in compensation since 2003. But when housing prices began declining in 2006, choices at Freddie Mac and Fannie Mae proved disastrous. Stock prices at both companies have fallen by more than 60 percent since February, destroying more than $80 billion of shareholder value.

More than two dozen current and former high-ranking executives at Freddie Mac, analysts, shareholders and regulators said in interviews that Mr. Syron had ignored recommendations that could have helped avoid the current crisis."

This was simply greed on the part of an executive, a transference of wealth from  Shareholders to himself . . .

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Related:
Ruminations on Moral Hazard   
naked capitalism, August 5, 2008
http://www.nakedcapitalism.com/2008/08/ruminations-on-moral-hazard.html

Previously:
Poole: Fannie, Freddie `Insolvent' After Losses (July 2008)
http://bigpicture.typepad.com/comments/2008/07/poole-fannie-fr.html

FREDDIE MAC: Spending as if they had a good year (December 2007)
http://bigpicture.typepad.com/comments/2007/12/freddie-mac-spe.html

Fannie Mae Looks Like Hell (November 2007)
http://bigpicture.typepad.com/comments/2007/11/fannie-mae-look.html

Source:
At Freddie Mac, Chief Discarded Warning Signs
CHARLES DUHIGG
NYT,  August 5, 2008
http://www.nytimes.com/2008/08/05/business/05freddie.html

Tuesday, August 05, 2008 | 09:00 AM | Permalink | Comments (25) | TrackBack (1)
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» Fannie from The Big Picture
Last evening, we asked what are the costs and consequences, as well as the market reaction to, the imminent bailout of Fannie Mae (FNM) and Freddie Mac (FRE). Your responses were inspired and informative. (For a brief history of the GSEs, see this earl... [Read More]

Tracked on Sep 6, 2008 6:58:12 AM

Comments

I guess this Bloomberg piece has gone around the web by now...

http://www.bloomberg.com/apps/news?pid=20601109&sid=azswcZQvmUX0&refer=home

I am just het up with the irony.

Posted by: zackattack | Aug 5, 2008 9:10:18 AM

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