Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Tuesday, August 05, 2008

Risk Assessment? We don't need no stinkin' risk assessment!

...(sentiments of CEO of Freddie Mac, Richard F. Syron?)

(from the NYTimes)

"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.”'

"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."

"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."

"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."

'“He said we couldn’t afford to say no to anyone,” Mr. Andrukonis said. Over the next three years, Freddie Mac continued buying riskier loans."

"Mr. Syron contends his options were limited."

'“If I had better foresight, maybe I could have improved things a little bit,” he said. “But frankly, if I had perfect foresight, I would never have taken this job in the first place.”'

"Mr. Syron, has collected more than $38 million in compensation since 2003."

"Stock prices at both companies (Freddie Mac & Fannie Mae) have fallen by more than 60 percent since February, destroying more than $80 billion of shareholder value."

"Mr. Syron and the Fannie Mae chief executive, Daniel H. Mudd, defended their choices, saying in interviews that they did not anticipate that the housing market would decline so quickly and that they were buffeted by conflicting pressures."

'“This company has to answer to shareholders, to our regulator and to Congress, and those groups often demand completely contradictory things,” Mr. Syron said in an interview."

"Others, however, dismiss that explanation. “Sure, it’s hard to deal with the pressures of Congress and shareholders and regulators,” said a former high-ranking Freddie Mac executive. “But that’s why executives get paid so much. It’s not acceptable to blame those pressures for making bad choices.”'

"Mr. Syron joined Freddie Mac as chief executive and chairman in 2003, after the company revealed it had manipulated earnings by almost $5 billion. He came to Freddie Mac after serving as chairman of the Thermo Electron Corporation, a scientific instruments firm, and of the American Stock Exchange."

"Mr. Mudd was promoted to chief executive of Fannie Mae the following year, after that company was also accused of accounting errors totaling $6.3 billion. His compensation has totaled more than $42 million."

"By the time both men took over, the firms had perfected the art of making money by capitalizing on the perception they were implicitly backed by the government. That belief allowed Fannie and Freddie to borrow at relatively low rates and use those funds to buy mortgages as investments. The companies also collected fees in exchange for guaranteeing that borrowers would repay other home loans."

"By the end of 2007, the firms held mortgages worth more than $1.4 trillion combined, and guaranteed payments on loans worth $3.5 trillion more."

"Both firms had sophisticated systems to hedge against risks. But they remained exposed to one unlikely, but potentially catastrophic possibility: a wide-scale decline in national home prices.
The only real protection against such a downfall was purchasing only the safest loans."

"However, the companies were constantly under pressure to buy riskier mortgages."

"Mr. Syron and Mr. Mudd eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out."

'“The thinking was that if something really bad happened to the housing market, then the government would need Freddie and Fannie more than ever, and would have to rescue them,” Mr. Andrukonis said. “Everybody understood that at some level the company was putting taxpayers at risk.”'

"For years, the companies collected rich profits. But some executives grew increasingly concerned."

"Mr. Andrukonis wrote his memo in 2004. At the time, he also briefed the risk oversight committee of the board of directors, but did not share his memo with them, he said. A member of that committee declined to return phone calls."

"In 2007, as home prices were falling and defaults rising in some areas, people at both firms urged their chief executives to scale back on mortgage purchases. Fannie Mae shrunk its mortgage portfolio slightly."

"Mr. Syron’s Freddie Mac, however, increased its portfolio by $17 billion."

"That same year the companies posted combined losses of $5.2 billion. This year, they have announced losses of $2.4 billion, and analysts say they may lose an additional $24 billion or more."
"Last month, after weeks of rumors and bad news, investors began dumping the companies’ shares, driving their stock prices down almost 60 percent apiece. The selling did not subside until Mr. Paulson unveiled a rescue plan with powers to inject billions of taxpayer dollars into the companies." (now a law)

"The law, signed by President Bush last week, also gives the government sweeping new regulatory control over the firms."

'“It basically worked exactly as everyone expected — when things got bad, the government came to the rescue,” said a second former high-ranking Freddie Mac executive. “But we didn’t expect it would come at the cost of a new regulator who now has the power to burrow into our business forever.”'


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