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Regulating Freddie Mac:

The Washington Post has an interesting story on conflict between Freddie Mac and the feds.

Half a year after the government seized Freddie Mac, confusion about its role is stoking tensions between the company and its regulator, including a dispute this month over how much the mortgage giant should reveal to private investors about its financial troubles.

Federal officials who took over Freddie Mac stopped short of nationalizing the company, leaving it partly in private hands. This means Freddie still has to answer to investors and file financial disclosures.

But when Freddie Mac's executives concluded a few weeks ago that they had to disclose that the government's management of the McLean company was undermining its profitability and would cost it tens of billions of dollars, the firm's regulator urged it not to do so, according to several sources familiar with the matter.

Freddie Mac executives refused to bend. The clash grew so severe that they threatened to go to the Securities and Exchange Commission, which oversees corporate disclosures, to secure a ruling that the regulator's request was out of line. The company's regulator backed down, the sources said.

Cornellian (mail):

But when Freddie Mac's executives concluded a few weeks ago that they had to disclose that the government's management of the McLean company was undermining its profitability and would cost it tens of billions of dollars, the firm's regulator urged it not to do so, according to several sources familiar with the matter.


Oh right, like those executives were just racking up the profits until the government stepped in.
3.29.2009 10:49am
DiverDan (mail):

Oh right, like those executives were just racking up the profits until the government stepped in.


Cornellian, have you never heard the SEC required disclosure that "Past Experience is no guarantee of future performance"? Anyone with the slightest knowledge of accounting knows that profit and loss reports are just a snapshot of a finite period of time, just as a balance is a snapshot at a single moment (and these snapshots are taken through the filters of various accounting rules, such as depreciated cost basis, mark-to-market, and how contingent liabilities are reported, and how costs are paired with revenues, all of which can distort the picture). The fact that Freddie Mac lost a lot of money in some past period is not necessarily an indication that it will continue to lose money, especially if the government takeover resulted in its divestiture of bad assets. Frankly, I don't find it surprising at all that government management (where decisions are made based as much, if not more, on political criteria as on economic criteria) would result in lower profits, OR that the responsible governmental agencies would try to hide their own malfeasance.
3.29.2009 11:43am
Nick B (mail):
Also, I do not think "undermining its profitability and would cost it tens of billions of dollars," in any way states they were making a profit, just that they were making less than they could be, independent of the total they are making. (IE they are making X, they could be making X+10, where X may be anything, -100b to +100b or more)
Nick
3.29.2009 12:03pm
poul (mail) (www):
hope and change, hope and change...
3.29.2009 12:20pm
Constantin:
I wonder what Rahm thinks about this lack of transparency?
3.29.2009 12:33pm
Paul Allen:
I'm surprised that the story only passingly mentions David Moffett's resignation. As I understand it, the forced losses being incurred under the Obama Housing Plan were a significant factor.

Regardless, Freddie seems to have taken the same position I did regarding these write-downs. The plan translates vague, possible future losses into definite, immediate losses--which can is absolutely devastating to a bank's capital position. Remember: banks earn tremendous amounts of money, but time is essential.

Several authors of this blog, most notably Eric, attempted to defend this plan with outlandish claims about value lost in foreclosure. There argument erred in two places. First they used historic data on recovered foreclosure values, but the bank as agent pushes for the quickest sale that covers the value of the mortgage outstanding. Historically most foreclosed properties had significant equity, so the bank would have changed its approach if the auction wouldn't have covered the loan.

Second, they presented a false dichotomy between foreclosure-sale and cramdown. The other alternatives: the bank chooses to allow a technical default to persist and the seizes the house and withholds it from immediate auction, offer much better long-term recovery in this market.
3.29.2009 1:26pm
Andy Freeman (mail):
> Oh right, like those executives were just racking up the profits until the government stepped in.

Actually, those executives were "just racking up the profits" but they weren't doing so at Fannie and Freddie.

Fannie and Freddie's current executives are the folks hired to clean up the mess.

They're not the folks who made the mess, the folks who ran Fannie and Freddie when Fannie and Freddie were planting bombs in the financial sector.

Many of the "mess makers" are now in the Obama administration.
3.29.2009 1:27pm
Paul Allen:
Cornellian:

"Oh right, like those executives were just racking up the profits until the government stepped in."

No, they were taking losses, but Freddie actually had quite a bit of cash on its books (at least under the relaxed standards to which it was held). Until Obama came in, actual losses were being held to about 1B/mo, which was quite sustainable.

Remember: these firms were bought by the government not because they were insolvent (yet) but because the market feared they would become insolvent (soon). These fears arouse because the firms' ability to refinance their own debt was impaired. Thus the specter of a sudden debt default quite independent of the actual loan-losses.
3.29.2009 1:32pm
Cornellian (mail):
Cornellian, have you never heard the SEC required disclosure that "Past Experience is no guarantee of future performance"?


Not that this is all that relevant to the post, but that's language companies use in their public statements to try to reduce the risk of being found liable for securities fraud for a forward looking statement that turns out to be wrong. It's not SEC required disclosure and it wouldn't even matter in this case since the statement "Government directive X caused us to lose Y dollars" isn't a forward looking statement.
3.29.2009 1:44pm
Bpbatista (mail):
Obama just forced the CEO of GM to resign. Will he force the management at Freddie Mac to leave too? Or are Democrat apparatchiks still running that place and immune from firing?
3.29.2009 6:47pm
pmorem (mail):
As I understand it, the difference between Communists and Fascists is as follows:

Communists believe The State should own the means of production.

Fascists belive The State should control the means of production.

I don't believe Obama is a Communist.
3.29.2009 9:30pm
Hans Bader (mail) (www):
Can I sue? The government deliberately made Freddie Mac lose more money to prop up the larger economy and support political objectives -- shrinking the value of my retirement account in the process.

After federal regulators took over failing mortgage giant Freddie Mac, they didn't stop its risky lending practices. Instead, they made it run up even bigger losses at taxpayer expense to try to artificially pump up the economy. They made Freddie buy lots of risky mortgage loans to meet federal affordable housing goals.

Recently, the Obama Administration forced it to incur $30 billion in losses as part of the administration's bailout for irresponsible mortgage borrowers, which caps mortgage payments for even high-income borrowers (mortgages up to $729,750) at a ridiculously low level (31 percent of gross income for mortgage and property taxes combined -- less than many homeowers pay without difficulty in high living-cost areas like San Francisco and Washington, DC). The Obama Administration tried to prevent Freddie Mac from even disclosing these losses in the financial disclosures it must make to investors under the securities laws.

My 403(b) retirement plan was 35% invested in Legg Mason Value Trust, which bought a big percentage of Freddie Mac stock. (Thankfully, the other 65 percent was prudently invested in a good mutual fund). I cashed it out early this year at a substantial loss.

Given the government's ability to take even a badly-managed company and run it even worse, why should anyone support Treasury Secretary Geithner's demand last week for vast new powers to take over companies that he thinks pose risks to the economy, or risks of failing? Especially given Geithner's history of bungling responses to past economic crises, such as his role in the meltdown of Indonesia's economy in the East Asian Financial Crisis of the 1990s (Australia's long-time Prime Minister, Paul Keating, has chronicled Geithner's role in destroying the economy of Indonesia. Keating, by the way, was the head of Australia's Labor Party -- their version of the U.S. Democratic Party).

Ironically, I was a huge critic of GSEs like Fannie Mae and Freddie Mac and their practices (I didn't know my mutual fund would buy a ton of Freddie Mac shares before Freddie got taken over).

But federal regulators have been so reckless that they have managed to make matters even worse.
3.30.2009 6:03pm

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