Greetings Editor,
You wrote a very interesting article titled "How Did Freddie and Fannie Fall?" However, I would like to add some information that I found to be missing or inaccurate from your piece.
First, you stated that, "The two giants could borrow with the strength of the U.S. government…" This statement implies what everyone believed about Fannie and Freddie but was never true until recently and that is the government guarantee of the agencies. Everyone always stated as a fact that the agencies had implicit guarantees when referencing the company’s financial strength. Again, the actual guarantee never existed until this week.
The next matter of concern in your article is the statement "Who's to blame for creating this Frankenstein? 'Blame' is a strong word. This isn't Enron. 'Who was ignorant enough?' is probably a better way to put it." The matters faced by Fannie and Freddie is eerily similar to the tactics used by Enron minus the offshore entities. In 2003, Freddie Mac was forced to restate 3 years of earnings results that led the company to stop reporting earnings for a brief period of time.[i] This after the company was found to have been speculating in the interest rate derivatives market to pad their earnings.[ii] Shortly after Fannie Mae's accounting troubles, 0n September 23, 2004, USA Today quoted Standard & Poor’s as warning investors that, “the sheer complexity of Fannie Mae's activities, together with complex (accounting) rules for derivatives, reduce the overall clarity of financial reporting."[iii] The complexity of the activities was intended to falsify their financial status to ensure that management met quarterly earnings guidance. Meeting their (Fannie’s) guidance ensured that the executives were able to obtain the maximum incentives offered by the board of directors. In retrospect, these strategies are not similar to what Enron did; instead it was exactly what Enron did.
Finally, your article claims that a level of hype was created about Fannie and Freddie that somehow was unwarranted. Unfortunately, a majority of investors and politicians had every right to believe that the “hype” was real. How is this possible? Because when the regulator of Fannie Mae and Freddie Mac, Office of Federal Housing Enterprise Oversight (OFHEO), in response to the failure of Long Term Capital Management, spent two years researching and on February 4, 2003 generated a report title, “Systemic Risk: Fannie, Freddie and the role of OFHEO” the head of the agency was fired the next day. This report was intended to prepare the government, regulators and the banking system for whatever the worst-case scenario might be. Instead, it was treated with the regard of a tabloid magazine and relegate to the conspiracy file. It is a wonder that OFHEO still allows the public to access this document. It is clear that the Congress, Treasury and Federal Reserve aren’t reading the section on how to remedy the current dilemma we’re in.
For the reasons stated above, in the minds of many, the hype was real and therefore ensured the loss of what appears to be, at least, $200 billion in a matter of days and much more down the road.
You wrote a very interesting article titled "How Did Freddie and Fannie Fall?" However, I would like to add some information that I found to be missing or inaccurate from your piece.
First, you stated that, "The two giants could borrow with the strength of the U.S. government…" This statement implies what everyone believed about Fannie and Freddie but was never true until recently and that is the government guarantee of the agencies. Everyone always stated as a fact that the agencies had implicit guarantees when referencing the company’s financial strength. Again, the actual guarantee never existed until this week.
The next matter of concern in your article is the statement "Who's to blame for creating this Frankenstein? 'Blame' is a strong word. This isn't Enron. 'Who was ignorant enough?' is probably a better way to put it." The matters faced by Fannie and Freddie is eerily similar to the tactics used by Enron minus the offshore entities. In 2003, Freddie Mac was forced to restate 3 years of earnings results that led the company to stop reporting earnings for a brief period of time.[i] This after the company was found to have been speculating in the interest rate derivatives market to pad their earnings.[ii] Shortly after Fannie Mae's accounting troubles, 0n September 23, 2004, USA Today quoted Standard & Poor’s as warning investors that, “the sheer complexity of Fannie Mae's activities, together with complex (accounting) rules for derivatives, reduce the overall clarity of financial reporting."[iii] The complexity of the activities was intended to falsify their financial status to ensure that management met quarterly earnings guidance. Meeting their (Fannie’s) guidance ensured that the executives were able to obtain the maximum incentives offered by the board of directors. In retrospect, these strategies are not similar to what Enron did; instead it was exactly what Enron did.
Finally, your article claims that a level of hype was created about Fannie and Freddie that somehow was unwarranted. Unfortunately, a majority of investors and politicians had every right to believe that the “hype” was real. How is this possible? Because when the regulator of Fannie Mae and Freddie Mac, Office of Federal Housing Enterprise Oversight (OFHEO), in response to the failure of Long Term Capital Management, spent two years researching and on February 4, 2003 generated a report title, “Systemic Risk: Fannie, Freddie and the role of OFHEO” the head of the agency was fired the next day. This report was intended to prepare the government, regulators and the banking system for whatever the worst-case scenario might be. Instead, it was treated with the regard of a tabloid magazine and relegate to the conspiracy file. It is a wonder that OFHEO still allows the public to access this document. It is clear that the Congress, Treasury and Federal Reserve aren’t reading the section on how to remedy the current dilemma we’re in.
For the reasons stated above, in the minds of many, the hype was real and therefore ensured the loss of what appears to be, at least, $200 billion in a matter of days and much more down the road.
Sources:
[i] Muolo, Paul. "Analyst: Fannie Might Halt Earnings." National Mortgage News . Oct 4, 2004.[ii] Collins, Brian. "Did Freddie Speculate on Rates?." National Mortgage News . Jan 5, 2004.[iii] "Critics call for 'urgent action' by regulators." USA Today .Sept 23, 2004.
