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Wednesday, March 10, 2010

The Fannie Mae Fraud Time Machine Courtesy of Michael Burry

Earlier this week I linked to an excerpt of Michael Lewis's new book about Scion Capital's Michael Burry.  My friend, The Dude, pointed me to Scion's website, which contains the following statement:

"Thank you for visiting. Dr. Michael Burry has liquidated Scion Capital, LLC and is currently focusing on his private investments. Dr. Burry is not accepting outside investors.


If you have an interest, Dr. Burry has made Scion Capital's earliest investor reports available."

Interesting... there is also this, which I re-post in its entirety, emphasis mine: (obviously, well worth the 5 minutes it will take you to read it)

"Further, Dr. Burry feels the financial crises originating in the United States and elsewhere were eminently predictable and preventable. The following timeline regarding developments at Fannie Mae and Freddie Mac is illustrative of why the crises were not prevented.

July 2003 (Scion Capital Quarterly Report to Investors): "Freddie Mac and Fannie Mae warrant special comment. Interestingly, Fannie Mae, when it was a much less significant force, was declared insolvent on a mark-to-market basis by the U.S. General Accounting Office back in 1981. As well, each of the two predecessors to the just- fired CEO of Freddie Mac left Freddie to run S&L’s that they subsequently ran into the ground during the 1980s. Yet the market reserved a muted reaction for Freddie Mac firing its top three executives last month over an accounting scandal and, with a straight face, blaming the mess on a lack of accounting expertise within the company.

After hearing from Fannie, Freddie and representatives of the President, U.S. Rep. Richard Baker, a longtime and vehement critic of these two companies, has elected to withhold any knockout punch. Fannie Mae’s CEO in particular lacked subtlety. Citing the company’s primary importance to the national housing market and relying on Fannie’s formidable political connections, he publicly dared the U.S. Congress to act. Not so much as one peep of indignation was heard in response. To the extent the national housing market is untouchable, we have evidence not of strength but of fragility."

October 2004 (Scion Capital Quarterly Report to Investors): "I recently watched Mr. Franklin Raines, CEO and Chairman of Fannie Mae, defend himself before a House subcommittee against allegations of fraudulent financial reporting brought by its regulator, OFHEO. I have already read OFHEO’s interim report on the matter, and you know from prior letters that I have had a dim view of Fannie Mae and its CEO for some time. My impression: Fannie Mae is unregulated, and they are very likely committing fraud. 

An entity is not being regulated if it takes subpoenas and threats from the Department of Justice in order to obtain management’s cooperation in a regulatory review. Too, an entity is not being regulated if a Congressional investigation cannot be performed due to wholly inadequate knowledge of the business at issue on the part of the investigators. Watching our representatives flail at questioning Mr. Raines was rather shocking. They were in no manner capable of getting past the headline issues, and even those were covered only in superficial fashion. Remarkably, these particular representatives were members of the House subcommittee specifically charged with regulating the GSEs.

Then there are Fannie’s friends, with whom Mr. Raines apparently spends most of his days. Rep. Artur Davis suggested OFHEO was putting Fannie in more danger with the release of the report. Rep. Barney Frank, the House Financial Services subcommittee’s lead Democrat, went so far as to charge that OFHEO was "irresponsible." Yet, how can a regulator be irresponsible simply by letting the public know it suspects foul play on the part of the regulated?"

On the subject of fraud, OFHEO’s report makes clear Fannie’s intent to deceive. The report details not gray areas of accounting, but rather specific acts to manipulate earnings. Per the testimony of Armando Falcon, Jr., head of OFHEO, “The accounting violations cannot be dismissed as mere differences of interpretation in accounting rules. Fannie Mae understood the rules and simply chose not to follow them.” Time and again, the ethics of men and women have proven no match for a lucrative incentive structure.” 

November 11, 2004 (The Washington Post): A senior House Democrat said yesterday that he will not support a budget increase for the federal regulator of Fannie Mae until questions raised in a confidential report have been addressed. Rep. Barney Frank (Mass.), senior Democrat on the committee overseeing Fannie and its regulator, said in a letter to colleagues that an inspector general's report on how the Office of Federal Housing Enterprise Oversight examined the mortgage funding company's accounting "raises very serious issues which must be thoroughly discussed and addressed." Frank said in an interview that the issues involve "the role that OFHEO has played." The report "has major public policy implications," but he could not be more specific because the report has not been made public, he said. OFHEO has said recently that budget restrictions threaten to hamper its continuing investigation of Fannie Mae's accounting..
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2006 (The Washington Post): “Fannie Mae engaged in "extensive financial fraud" over six years by doctoring earnings so executives could collect hundreds of millions of dollars in bonuses, federal officials said yesterday in a report that portrayed a company determined to play by its own rules. Regulators at the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight, in announcing a settlement with Fannie Mae that includes $400 million in penalties, provided the most detailed picture yet of what went wrong at the congressionally chartered firm.” 

2009 (Reuters): "The Obama administration on December 24 pledged to backstop all future losses for the mortgage giants, without limit, through the end of 2012. The Christmas eve announcement also eased earlier requirements for Fannie and Freddie to reduce the size of their portfolios. The 2010 limits on their portfolios, in fact, would allow their investment holdings to grow.” 

2010 (Associated Press): “Freddie Mac, which has lost a total of almost $80 billion since the housing crisis started in 2007, is bracing for more pain. The McLean, Va.-based company said a record 4 percent of its borrowers are at least three months behind on their payments and facingforeclosure.Its chief executive, Charles Haldeman, warned Wednesday of a "potential large wave of foreclosures" still to come. This is a major problem for the federal government, which seized control of Freddie and Fannie in September 2008. The two companies have already siphoned $111 billion from the government to stay afloat. That number is expected to hit $188 billion by fall 2011.And while Freddie Mac didn't ask for any more bailout money last quarter, the company said it will likely need more financial aid and might never repay it.”


-KD

2 comments:

scharfy said...

I don't get this administration. Hate on Bush all ya wnat, but when Enron, Worldcom, Healthsouth, Tyco et al went down.. people went to jail.

The blatant pilfering the GSE's and in effect the looting of taxpayers, and nothing? Eric Holder seems preoccupied with civil rights of Gitmo detainees, while our average citizens are heisted on epic scale. And the biggest bills have yet come due, in my eyes.

Welcome to the USA brother.

JCH said...

Raines settled out of court for a tiny fraction of the amount for which he was being sued.

Not dismissing them completely, but the accounting issues were really a sideshow in terms of where FM&FM are now. If their accounting system had been perfect, we would still be roughly where we are. The real show is in the back and forth over exotic subrpime, and the effort by Greenspan to force FM &FM to sell off 1/2 trillion in MBS.

I read the Scion website before I read the Lewis article and found it disappointing.