Column of the Day: Fan and Fred Are “Scandals Waiting to Happen”
From an op-ed column in The Wall Street Journal (requires subscription; bolds are mine) by Congressman Scott Garrett (R-NJ), on recent legislation passed related to Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac (Fan and Fred):
Two weeks ago the House finally passed GSE legislation. But while I applaud the efforts of its crafters, the bill fails to protect the interests of taxpayers. Instead, it runs the very real risk of enriching private shareholders and CEOs at public expense.
…. Fannie and Freddie held a combined $132 billion, or 5.6%, of the single-family home-mortgage market in their own portfolios in the early 1990s. Over the last 15 years, this number has grown to roughly $1.5 trillion — almost 25% of the market. However, no one knows precisely what the GSE portfolios contain.
Among its many flaws, the House bill imposes a 5% tax on GSE annual profits to create a new “Affordable Housing Fund.” Inevitably, the GSEs will compensate for this lost income by holding an even larger percentage of mortgages and mortgage-backed securities in their own portfolios, further increasing the interest-rate risk associated with a volatile market. Unfortunately, many House Republicans abandoned their typical aversion to tax increases and supported this proposal. More surprisingly, House Democrats overwhelmingly supported the bill. Ever attacking the administration’s alleged “corporate coziness,” their votes represent an exercise in political hypocrisy. No private company could maintain such low standards of accountability as do these GSEs. Freddie and Fannie are scandals waiting to happen — on a scale that would make the Savings and Loan bailout seem trivial.
Questions:
- Note the Democrats’ chutzpah-laden “corporate coziness” charge. Despite the fact that the large majority of the portfolio buildup occurred in the 1990s while Democrats were in charge (including Democrat cronies in the executive suites), who do you think will get the Mainstream Media’s blame (partially but not fully deserved) if these GSEs blow up?
- Though they are GSEs, Fan and Fred (symbols FNM and FRE, respectively *) are also publicly held companies listed on the New York Stock Exchange. How can they be in compliance with Sarbanes Oxley if “no one know precisely what the GSE portfolios contain”? (E-mail me or do a comment if you have an explanation.)
* - The respective legal names of the entities are Federal National Mortgage Association and Federal Home Loan Mortgage Corporation.
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UPDATE: As noted in the comments below, Fan and Fred are already accounting and reporting scandals with late reports and statements not in accordance with generally accepted accounting principles. The only question is whether they are also financial disasters waiting to happen. Who knows?
How can they be in compliance with Sarbanes Oxley if “no one know precisely what the GSE portfolios contain�
Talk about a question that gets to the heart of the matter!!! Very insightful.
Check out the following from FannieMae Web Site:
Cautionary Note Regarding Previously Reported Financial Results - On December 22, 2004 Fannie Mae announced that its previously issued financial statements should not be relied upon in light of the SEC’s determination that the financial statements were prepared applying accounting practices that did not comply with generally accepted accounting principles, or GAAP. For more information, please see the Form 8-Ks Fannie Mae filed with the SEC on December 22, 2004, March 18, 2005, May 11, 2005, August 9, 2005, and November 10, 2005. As a result, investors and others should no longer rely on Fannie Mae’s previously issued annual and quarterly financial statements and the corresponding information for those periods contained in earnings releases, Annual Reports, Form 10-Ks, Form 10-Qs, Form 8-Ks, Form 12b-25, Monthly Summaries and Business Activity Supplements.
So what happens when one starts looking for the current 10-Q?
Well, according to this link
Fannie filed this Notification of inability to timely file Form 10-Q or 10-QSB just one week ago on 11/10/2005.
The 10-Q is ” a comprehensive report of a company’s performance that must be submitted quarterly by all public companies to the Securities & Exchange Commission. In the 10-Q, firms are required to disclose relevant information regarding their financial position. The form must be submitted on time, and the information should be available to all interested parties.”; according to http://www.investopedia.com/terms/1/10q.asp .
Comment by Porkopolis — November 17, 2005 @ 3:12 pm
#1, Thanks, Mario. I put your longer URLs inside clickable links because my comments box makes the whole page wider if I don’t. I didn’t change any text.
I thought they were behind on their reporting. I’m quite familiar with 10-Ks/10Qs from years in public accounting, and yes, I was also concerned about whether their statements are in accordance with GAAP (which I sort of knew they weren’t), let alone Sarbox.
So how long do they get a pass until the SEC “moves in,” however they do that? I mean, at some point they’re supposed to suspend trading, I would think. How the bleep are investors supposed to evaluate these messes?
And while we’re at it, if their financials are screwed up, it’s almost certain their tax returns are a mess too and at some point need to be amended (going back how many years??). Shouldn’t the IRS be on their butts? Oh, I forgot, in another post I dealt with how THEY are screwed up (I suggested SarBox for them too).
This got out of control in the 1990s, which is bad, but the fact that they can’t get it back in control now is disgraceful. I think Raines, the guy who ruined Fred, has been gone for at least 2-1/2 years now.
I have some sympathy for the tax actually, because Fred and Fan are exempt from other taxes, therefore the playing field isn’t level vs. others who might privately securitize mortgages. But the tax should go straight to the Treasury, not create another slush fund, which the Affordable Housing Fund is.
But our boneheads in Congress won’t force them to rein in their portfolios, and as the Congressman said, this in fact sets them up to expand their scope. This could be an OMFG mess, as he noted.
When you get right down to it, Fan and Fred are already “scandals” in failure to report, and to report accurately. The question is whether they are financial disasters waiting to happen as well. Until the “scandal” part gets cleared up, how do we know?
Comment by TBlumer — November 17, 2005 @ 3:40 pm
#1, some more: All of this makes me wonder if they aren’t already too big to fail, which is a BIG, BIG problem.
Comment by TBlumer — November 17, 2005 @ 3:51 pm