US Lawmakers Blast Ex-Fannie, Freddie CEOs For Risk Taking
12/09 11:13 AM
By Michael R. Crittenden and Jessica Holzer
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--U.S. House lawmakers harshly criticized former Fannie Mae (FNM:$0.8225,$-0.0175,-2.08%) and Freddie Mac (FRE:$0.82,00$-0.02,00-2.38%) executives on Tuesday, blaming them for knowingly taking on excessive risks that helped lead to the government takeover of the firms.
"The CEOs of Fannie and Freddie made reckless bets that led to the downfall of their companies," House Oversight and Government Reform Chairman Henry Waxman, D-Calif., said. "Their actions could cost taxpayers hundreds of billions of dollars."
Republicans struck an even harsher tone. Rep. Darrell Issa, R-Calif., said the two government-sponsored enterprises were "a primary cause, if not the primary cause" of the collapse of the housing market.
"Outright fraud and greed wasn't isolated to just Wall Street," Issa said. " Fannie and Freddie shared in this disgrace as it drove much of the poor decision making that have led us to where we are today."
Lawmakers cited thousands of documents collected by the committee that Waxman said "show that the companies made irresponsible investments" that destabilized the firms and forced the government to put the companies in conservatorship in September.
Specifically, the panel released a June 2005 presentation made by former Fannie CEO Daniel Mudd that suggested the firm should move away from the traditional mortgage market in order to take advantage of the growing subprime and non-prime loan businesses.
"If we do not seriously invest in these 'underground' type efforts and the market changes prove to be secular, we risk: becoming a niche player; becoming less of a market leader; becoming less relevant to the secondary market," the presentation slides say.
Fannie, the slides continue, could "meet the market where the market is" by accepting higher risk and more volatile earnings.
Waxman said, "Their own risk managers raised warning after warning about the dangers of investing heavily in the subprime and alternative mortgage market. But these warnings were ignored."
Mudd, along with other former executives from the two firms, defended their decision to expand into non-traditional mortgage businesses. Richard Syron, the former Freddie CEO who was forced out when the government took over the firms in September, cited the legal and regulatory mandates the firms had to meet because they are congressionally chartered.
"We had obligations to Congress and to the public to promote our chartered purposes of increasing affordability, liquidity and stability in housing finance, which included some very specific low-income housing goals," Syron said.
Franklin Raines, the former Clinton-administration official who served as Fannie chief executive before leaving the firm in late 2004 following an accounting scandal, said Wall Street firms caused the housing crisis, not the GSEs. He blamed the crisis on the entrance of many new investors into the mortgage-backed securities market, whom he said were "not natural holders of 30- year obligations."
"When the market began to drop, these players panicked, drove down the prices of MBS, and dried up the liquidity of the market," Raines said.
He noted that in 2004, the firm's share of the secondary mortgage market dropped sharply as the firm was restricted from buying or guaranteeing riskier Alt-A mortgage loans. Raines said Fannie Mae (FNM:$0.8225,$-0.0175,-2.08%) followed "a lot of smart investors" when it decided to take on more risk after 2004, but he argued that Fannie Mae (FNM:$0.8225,$-0.0175,-2.08%) was a late entrant into the market for risky mortgages.
"By the time the GSE began its most significant investments in riskier loans in 2005, the roots of the present crisis had long taken hold," Raines said. "If anything, Fannie Mae (FNM:$0.8225,$-0.0175,-2.08%) played catch-up to the banks and investment banks who drove the securitization of the most toxic subprime mortgages."
Mudd also took the opportunity to suggest that the Treasury Department and the firms' regulator, the Federal Housing Finance Agency, did not have to take the dramatic step of placing the firms in conservatorship. He suggested that a capital injection like those now being enjoyed by the banking industry through Treasury's Troubled Asset Relief Program would have been appropriate.
"I made the argument at the time and proposed that more modest government support could be used to encourage private investment capital - basically something more like the program many banks are now eligible for," Mudd said.
He also said lawmakers and the next administration need to decide on the future role of the GSEs - whether it be as public or private companies.
"Events have shown how difficult it is to balance financial, capital, market, housing, shareholder, bondholder, homeowner, private and public interests in a crisis of these proportions," Mudd said.
The debate over Fannie and Freddie has simmered for months, with Republicans and Democrats exchanging barbs about which party contributed more to the companies' collapse. Issa used the hearing to take aim at Senate Banking Chairman Christopher Dodd, D-Conn., and House Financial Services Chairman Barney Frank, D-Mass.
"These two men are chairman of two of the most important committees dealing with this financial crisis, yet they appear to be wearing blinders in wanting to discuss the full range of issues that underlie this crisis," Issa said.
Waxman, however, said the documents collected by the panel don't support GOP claims that the firms were the main cause of the subprime housing collapse.
"It is a myth to say they were the originators of the subprime crisis," he said. "Fundamentally, they were following the market, not leading it."
-By Michael R. Crittenden and Jessica Holzer, Dow Jones Newswires; 202-862- 9273; michael.crittenden@dowjones.com and jessica.holzer@dowjones.com.
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(END) Dow Jones Newswires
12-09-081113ET
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