His Name is Mudd
"In 2006 and early 2007, the industry, many analysts and market observers were generally not predicting a downturn in the housing and credit markets to the magnitude of what has since emerged, and outlooks for particular market segments at that time varied significantly."
-Fannie Mae chief Daniel H. Mudd
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That is the excuse given by Fannie Mae CEO Daniel Mudd as to why the GSE bought into so much ruinous paper (and at the peak of the market to boot).
One would imagine that the people running the biggest purchaser of mortgages in the world would have their own independent expert view, would understand housing, and might be familiar with the real estate cycles in the United States.
One would be wrong.
I find it amusing that some lying liars argue that the Fannie Mae (FNM) and Freddie Mac (FRE) were "forced" to purchase sketchy mortgages by some government HUD or CRA mandate. As the Washington Post reveals, that turns out to be completely false. Rather, it was a mad grab for growth that sent Fannie into the arms of the most risky mortgages.
Fannie was supposed to be buying mortgages and then securitizing them itself. Instead, Fannie Mae thought itself a large hedge fund, and was investing in RMBS and derivatives packaged by others. According to regulatory data, as far back as 2002, Fannie Mae had invested in "tens of billions of dollars of such securities."
The risk reach by Fannie is detailed in a number of the internal Fannie memos that describes this as part of their growth oriented business model:
In January 2007, as years of loose mortgage lending were about to send the nation's housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board.
Discussing the company's successes, Mudd said one of Fannie Mae's achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step "toward optimizing our business."
A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.
Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.
One last factor: WaPo adds that during the housing boom years, Fannie was "distracted by an accounting scandal and its fallout. For much of 2006, the company was focused on a continuing effort to correct years of false financial reports, a massive project that cost more than $1 billion and ultimately revealed that Fannie Mae had overstated past profits by $6.3 billion."
I didn't think companies could overstate REVENUES by more than six billion dollars, and these clowns were overstating profits by that amount. (Why aren't a lot of people in jail over this?)
There's more at WaPo...
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Previously:
William Ackman on Fannie & Freddie (July 2008)
http://bigpicture.typepad.com/comments/2008/07/william-ackman.html
Even More Writedowns Coming (July 2008)
http://bigpicture.typepad.com/comments/2008/07/ofheo-more-writ.html
Source:
Fannie's Perilous Pursuit of Subprime Loans
David S. Hilzenrath
Washington Post, August 19, 2008; Page D01
http://www.washingtonpost.com/wp-dyn/content/article/2008/08/18/AR2008081802111.html
Wednesday, August 20, 2008 | 09:00 AM | Permalink
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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 6:58:11 AM
Comments
Why aren't more people involved in the corporate/governmental crime spree in jail over all of it? The criminality is conducted broadly, brazenly, and in open daylight.
Criminality has become our culture.
Posted by: Marcus Aurelius | Aug 20, 2008 9:12:29 AM
Must read article, nice post:
Unfnbelievable, these guys rewarded themselves and their employees with gifts and parties for fixing a major error (errr fraud) that occured previously.
"Mudd promised his employees a celebration when the restatement was done, and he delivered. In December 2006, the company threw a holiday bash at a Washington hotel with entertainment by Earth, Wind & Fire, the '70s group known for such hits as "Boogie Wonderland" and "Fantasy."
"I hope you had a fantastic time at the holiday party. I sure did. And my feet still hurt. Thank you for making the party a blowout,"
Posted by: Joe | Aug 20, 2008 9:51:42 AM
'Distracted' -- good old WaPo. Yes, the poor itty bitty widdle managers of a 5 trillion dollar corporations, were distracted by a 'scandal' that just came up out of nowhere, motivated by politcal elements in the opposition corporation (the evil am einnaf) who used scurrilous slurs of corporate mis-management because they hate the freedom of Fanni Mae and loathe their close relationship with the almighty. Yes that's right folks accounting 'scandals' are just 'distractions', one of the burdens of corporate management, the cross they have to bear. They are not responsible for these 'scandals' and have no recourse, being the fine upstanding citizens of stupendous moral fiber we know them to be, but to dilligently respond to these baseless, and meaningless attacks designed to undermine our faith in freedom, God, and Glory of the American Economy. We call on all loyal american citizens to stand by these titans of industry, these leading lights of liberty, in their moment of tremendous challenge and hardship. Please call 1-800-we-love-u and donate whatever cash you have to help them through their time of need. Or if you have no cash to donate, a pledge of a lifetime subscription to WaPo will be accepted as proof that you are a true and loyal citizen of Corporation USA.
America -- where no one is responsible and everyone gives until it kills em
Posted by: VoiceFromTheWilderness | Aug 20, 2008 9:53:43 AM
The definition of a columnist is a writer who puts the details in context. That's what the site has allowed you to become, an influential columnist. No one could have made sense of Enron without Floyd Norris even though there were very good reporters on the story.
The Mudd piece was significant because you pierced that self-serving defensive statement with a stunningly simple but trenchant point. Who cares what anyone else thought at the time? What was their analysis? In the process, you revealed the most damning thing about the GSEs is their ambition. Not content with their license to print money, the GSEs were run by people with ambitions to compete and surpass institutions working without a safety net.
Unlike the big funds, you showed that Mudd had no secret sauce. He didn't have strategy or model or data set that distinguished his firm. Whether they succeed of fail, we allow hedge funds because we think creativity and risk balance each other out. But it would appear that Mudd wanted the benefits without doing the creative work or taking the risk. All he had was the cheaper borrowing costs of the guarantee.
The other nagging issue is what about Fannie Mae encourages this kind of recklessness and fraud. They mention the accounting scandal (wasn't the problem with Raines that he was doing cookie jar accounting and managing earnings?) and it reminds you that the place seems to have been structured to generate some kind of fraud. Maybe there's something in the building.
I've gotten off my point. What a great columnist does is raise questions that drive the news cycle. You're just on the verge of having that kind of influence.
Posted by: Marion | Aug 20, 2008 9:59:24 AM
Barry: Only the "little people" (and the folks from Enron) go to prison. You should know that by now!
Posted by: Jeff M. | Aug 20, 2008 10:01:24 AM
Hmmm the Primus song 'My name is mud' kind of fits here...
My name is mud
Not to be confused with bill or jack or pete or dennis
My name is mud and its always been
cause Im the most boring sons-a-bitch youve ever seen
I dress in blue-yes navy blue
From head to toe Im rather drab except my patent shoes
I make em shine, well most the time
cept today my feet are troddin on by this friend of mine
Six foort two and rude as hell
I got to get him in the ground before he starts to smell
My name is mud
My name is mud, but call me alowishus devadander abercrombie
Thats long for mud so Ive been told
Told that by this sonsabitch that lies before me bloated blue and cold
Ive got my pride, I drink my wine
Id drink the finest except I havent earned a dime in several months
Or were it years
The breath on that fat bastard could bring any man to tears
We had our words, a common spat
So I kissed him upside the cranium with an aluminum baseball bat
My name is mud
Posted by: GB | Aug 20, 2008 10:04:29 AM
Who is buying FRE and FNM today? They are either idiots or they have the assurance from Paulson that he will come in with another bail out.
No sane money manager would be buying these stocks without some hint that there is a way out.
Posted by: Tom | Aug 20, 2008 10:08:58 AM
I think Attorney General Muskasey succinctly reflected the current regulatory climate---
“Not every wrong, or even every violation of the law, is a crime,” he said. In any case, the wrongdoers have been punished, he claimed, by “substantial negative publicity.”
http://www.nytimes.com/2008/08/13/opinion/13wed2.html
http://www.youtube.com/watch?v=4eZ_j_tEsqY
Posted by: Reality has become bizarro world | Aug 20, 2008 10:15:54 AM
Tom - there are idiots every day who will buy FRE FNM and LEH.
Interesting discussion this morning with Gary Kaminsky and Bob Doll on CNBC. Kernen was out so Becky Q let them talk and they were very bearish on retail and commercial RE in particular.
Posted by: leftback | Aug 20, 2008 10:23:22 AM
What is the play book here. When Paulson finally realizes his only option is to wipe out the shareholders of FRE and FNM who will benefit from the taxpayer bailing out the bond holders?
Are the usual characters going to run on the pronouncement that the financial are saved (MER, GS, MS, LEH, etc)?
Posted by: Tom | Aug 20, 2008 10:23:27 AM
Getting interviewed by aging pom-pom girl Mario Bartiromo is only punishment to the viewing public.
Posted by: anonymous coward | Aug 20, 2008 10:23:52 AM
What utter horsecrap! My cat could see that the path the housing market and the credit markets were one were unsustainable. Many people were accurately, thoughtfully spelling out this as well. For those claiming in one manner or another they couldn't have known, they are committing the most egregious personal and professional suicide of their character possible. For that alone, they need time behind bars, all of them.
Posted by: Stuart | Aug 20, 2008 10:32:55 AM
Don't a lot of foriegners own bonds in these? I heard that's why Bush administration didn't let it fail. That who will probably benefit the most.
Posted by: GB | Aug 20, 2008 10:34:42 AM
Who's buying 'em? I guess people who think this is a 1991 re-run.
I dunno, maybe at some point - 50 cents or below - I'd almost be compelled to take a swing, using pure risk capital, at one of them as a call option on the notion that someone, somewhere, somehow in this trainwreck eventually does something non-stupid.
I know it's a stretch...
Posted by: zackattack | Aug 20, 2008 10:38:36 AM
primus sucks
Posted by: liam | Aug 20, 2008 10:47:45 AM
It's so sad that all this corruption is destroying your country. Russia is saying FO and there is nothing that can be done. The rest of the world is catching up and taking over. Why can't America get it's act together? Perhaps all the smart people are just concerned with making money. And look where that got you? The defecits, the entitlements, the negative savings rates etc are destroying your country. What does it take to find some leadership, as opposed to party politicians? America's problem is instant gratification and it doesn't save enough. Are there no leaders out there who can stand up and tell the country the facts of life. And that I don't care if I get re-elected? Does nobody truly care anymore for the future of your country? Where are the solutions?
Life here on the beach in Bali seems pretty good, long cash, short financials and prepared for the worst.
But I sure as hell don't get why such a great country, for which I have tremendous respect and family ties just seems unable to get its act together.
What gives?
Posted by: philipat | Aug 20, 2008 10:48:56 AM
Quell the commentary, Barry!
Mudd's words and actions remind me of Chuck Prince's "as long as the music is playing, you've got to get up and dance" spiel. How will Mudd make out? Probably like a bandit, just like Prince, O'Neal and Tangelo.
Posted by: Mike J | Aug 20, 2008 11:03:57 AM
quote - "According to regulatory data, as far back as 2002, Fannie Mae had invested in "tens of billions of dollars of such securities."
Thats All? Outta $2.5 Trillion?
Minimum margin call folks.
"Please call 1-800-we-love-u and donate whatever cash you have to help them through their time of need"
You, me and foreigners ALREADY HAVE.
In the words of George Bailey "come on your money's in Joes house". "Potters not selling - He's buying"
and the MSM and CNBC are Potters henchmen
There is trouble in many the bank books. Don't fall for this ... as is!
Posted by: Greg0658 | Aug 20, 2008 11:21:15 AM
Mike J: I think Mudd's plan is to meet Prince, O'Neil and the Tan Man on the beach somewhere akin to the final scene in "Shawshank Redemption". Prince will be working on the boat, O'Neil will be body surfing, and Tan Man will be working on his tan when Mudd strolls up with a big grin on his face (and bag of money).
Posted by: Jeff M. | Aug 20, 2008 11:25:44 AM
Here's how it works:
The president says we need to inspire confidence in our markets. The need for Justice implies crime, and crime destroys confidence in our markets.
Any questions?
Posted by: mark mchugh | Aug 20, 2008 11:26:42 AM
Went to a State of a City Address last night. Seems an enterprising individual bought up over 100 acres of land around an interstate exit at $5K an acre and now is offering city option to buy at $22K each (for the plot). All fair in business as usual. I'm sure a tax shelter is in the plan.
Posted by: Greg0658 | Aug 20, 2008 11:43:25 AM
Philipat
Agree on the substance and defer on details as I would have written it ?
Enough with the contradictions in the USA, where they are good universities very good people and sub par politicians unable to read Machiavel without making a cartoon out of it, consuming not only its financial credit but the most important its credence.
Enough with the cult of money « before alles! » , enough with the self indulgence , and no I am not in Bali and no I do not short financials as they are too slim (à vaincre sans péril on triomphe sans gloire)
But yes I remember « It is not how you fall but how you stand up « !
Posted by: Philippe | Aug 20, 2008 11:44:00 AM
I didn't think companies could overstate REVENUES by more than six billion dollars, and these clowns were overstating profits by that amount. (Why aren't a lot of people in jail over this?)
BR: I love it when you come around to my way of thinking! From 11 July 2008:
Some people are discussing these financial issues as if they were a random black swan event. But that's incorrect; these events are the result of a long series of missteps in central banking, government actions, corporate errors, and risk mismanagementI think you've described the situation exactly right. Both Fannie Mae and Freddie Mac went out of their way to staff their executive suites with people with government and political connections rather than people who knew the business well - a pretty clear indication that they thought those kinds of connections that can influence how regulations get set and enforced mattered more than running a viable business.
The truth is that doing so paid off for a while, so successfully that they thought the rules they had rewritten at their direction would protect them from the risk of backing loans of ever worsening quality. And now, they're using the same connections to try to get out of the hole they dug for themselves.
I can't say whether either GSE is too big to fail, and should be bailed out by the federal government. But I do think that a reasonable trade to make in return for the government bailing one or both of them out is for those most politically connected in the executive suites of Fannie Mae or Freddie Mac to serve some quality time in a different kind of federal institution.
Posted by: Ironman | Aug 20, 2008 12:06:23 PM
Good thing that monkey Chris Cox & Co. made all that evil-doing shorting more difficult. Now we get to observe stocks plummet straight to ZERO and not stop or bounce because of short covering.
Morons.
-AT
Posted by: Andy Tabbo | Aug 20, 2008 12:12:10 PM
We hear a lot about Freddie and Fannie, but what about Ginnie? She couldn't be the prudent wallflower at dance, could she?
Posted by: ELS | Aug 20, 2008 12:13:55 PM
