Skip to comments.Still Clawing At Fannie And Freddie
Posted on 12/15/2005 9:33:09 AM PST by AdamSelene235
WASHINGTON, D.C. - As director of the U.S. Office of Federal Housing Enterprise Oversight, Armando Falcon took on the once untouchable mortgage finance giants, Fannie Mae and Freddie Mac. His efforts ultimately led to higher standards for risk management and the dismissals or retirements--depending on whom you ask--of top suits at both companies.
On Falcon's watch, Fannie and Freddie's fancy accounting footwork was exposed, encouraging some in Congress to try to limit the powers of these government-sponsored enterprises. But Falcon, who resigned in April and now helps institutional investors understand the policy world of Washington from his perch atop Canonbury Group, a consultancy, argues a bill pending in Congress doesn't go far enough. He shared his views with Forbes:
Forbes: You resigned under pressure from the White House after releasing your study about the risks Fannie and Freddie pose to the financial system. Now it looks as though your successor also is in trouble for speaking out. Do you see a problem with the independence at OFHEO?
Falcon: When I was director, I think the White House did respect the independence of the agency. I think there was a plan in the works before the release of my report to put their own person in place at the agency. It wasn't as much about independence, but more about me being a Clinton Administration appointee. That's why I stepped down willingly. If I thought it was because there would be a threat to the independence of the agency, I would have stuck around a little longer.
Forbes: What do you think of Congress considering legislation that would give a new regulator for Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) varying levels of authority to scale back the size of their holdings?
Falcon: It's very important that Congress pass legislation to strengthen powers of the regulatory agency. But it's not helpful for regulators to have their hands tied behind their backs on the issue of portfolio limits. I never really considered that was a final point to the legislation until the problems came up with Fannie and Freddie in accounting areas. Many of those problems arose because of the vast amount it took for the companies to manage the risk associated with the retained portfolios. (That is, the loans they keep instead of reselling in the secondary market.) Since the retained portfolios really don't contribute to the fulfillment of the mission of the companies (to promote housing and easy access to mortgages), it is time to get the companies to scale back their portfolios.
Forbes: Any specific number in mind?
Falcon: I wouldn't want to see a hard number in legislation, but the number mentioned by [Alan] Greenspan ($100 billion to $200 billion) is within the ballpark of what's necessary for the fulfillment of Fannie's and Freddie's mission.
Forbes: One of the things you asked for as head of OFHEO was more money and a bigger staff. The office now employs 221 and has a $60 million budget. Is that an appropriate level? (Acting Deputy Director Alfred Pollard recently said OFHEO, which was created in 1992, is now fully staffed and funded.)
Falcon: It is reaching a plateau where they're approaching the level of what's necessary for the agency to do their job. The growth at the agency has helped it achieve somewhere close to the levels for the agency to do its job. Additional growth at the rates we had before are not necessary.
Forbes: How did you react to (incoming Federal Reserve Chairman) Ben Bernanke's comments that the government-sponsored enterprises' current regulator, the Office of Federal Housing Enterprise Oversight, possesses "constrained capital authority" and "ineffective receivership" powers to take over Fannie's or Freddie's operations and liquidate their assets if necessary?
Falcon: I agree with that statement. We have no receivership powers now. It's still inadequate for what's needed. If one of these companies ever became insolvent, the agency would need all these tools to handle the liquidation of the company.
Forbes: Isn't that as likely as a meteor hitting earth?
Falcon: Irrespective of whether the powers are ever needed, the notion that one of the companies might become insolvent isn't too far fetched. In the 1980s, Fannie was losing $1 million a day and was technically insolvent.
Forbes: Based on your experience, what do you see as responsible for Congress' seeming reluctance to tighten rules on GSEs [government sponsored enterprises]?
Falcon: It's a reflection of the long-standing political alliance between GSEs and members of Congress. There are members of Congress who start out supporting solely the mission of the two companies, however, because the companies do a lot for members of Congress through campaign contributions, ribbon cutting ceremonies, support for charities of members of Congress, they're beholden to the companies' full agenda. If the money was turned off, at least then we would have an honest debate about the policy issues.
Forbes: What do you think is the likelihood that if and when the Securities and Exchange Commission comes down hard on Fannie and Freddie's accounting failings, defenders of GSEs will say the problem has been dealt with and, therefore, no additional legislation is necessary?
Falcon: That's a false hope. When I left, we had an agenda to make sure these problems don't occur again. These include putting the right culture and controls in place at the two companies and strengthening the authorities of the regulator. You have to give the regulator all it needs to do its job. It's imperative. If congress says it will do all it can to prevent another accounting scandal at Fannie and Freddie, it should pass strong legislation.
Forbes: Do you think you cost Franklin Raines his job?
Falcon: His own conduct cost him his job. The fact that OFHEO stood up to the pressure tactics of the agency shows that it did its job and, yes, contributed to the departure of Raines' from his job. But it wasn't the agency's decision about how he was conducting himself in his job. His ultimate weakness was arrogance. He was consumed by the trappings of power of Fannie's political machine.
Forbes: No one has gone to jail for accounting errors at Fannie or Freddie, yet you have lumped the firms in with WorldCom and Adelphia. How is that fair?
Falcon: I do see them as similar in terms of what breeds these types of problems at a company. People disregard rules and norms of conduct because of their arrogance. I don't think these were simple, honest errors that were made. I wouldn't be surprised if the next round of reports further illustrate people knew the rules and chose not to follow them.
Forbes: Fannie is trading at six times earnings and looks awfully cheap, considering no big default is imminent. Would you buy shares in it? Do you already own any?
Falcon: I'm not willing to suggest for others. I don't own any shares in Fannie or Freddie.
Why is more regulation necessary? What about less regulation - sever all government ties to and sponsorship of the GSEs and make them subject to the same investor pressures as any other private financial company.
Well heck! That's a strong buy recommendation if ever I heard one!! "No default is imminent."
("Is this medicine safe?" "It won't kill you immediately.")
"Still clawing at Fannie"?
Maybe they should wipe better...
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