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New York Times, September 14, 2008 column


The New York Times




September 14, 2008


Fair Game

The Joys of Ownership

Doug Mills/The New York Times

Treasury Secretary Henry M. Paulson Jr., left, and James B. Lockhart, director of the F.H.F.A.


SO, ladies and gentlemen, how does it feel to be the new owner of those two big and banged-up mortgage companies, Fannie Mae and Freddie Mac? Not exactly the kind of real estate you were looking to buy, you say? Felt you had swallowed enough garbage after the Bear Stearns bailout tapped you for $29 billion?

Make no mistake: we, the American taxpayers, are amassing quite a portfolio of flotsam and jetsam in the mortgage bust. It certainly brings new meaning to the notion of an ownership society, doesnít it?

To be sure, the terms of the Mac íní Mae rescue deal are still sinking in. And it will be years before we know how much taxpayers will have to pay for the privilege of backing these out-of-control entities. But in the meantime, here are some of the joys that ownership in Mac íní Mae might bring.

The proud new owners ó the taxpayers ó could be asked to cover such niceties as the pay packages awarded to the chief executives, Daniel H. Mudd at Fannie Mae and Richard F. Syron at Freddie Mac, as they exit the accident scene. Estimates for what these arrangements might cost: $24 million in severance, retirement benefits and deferred compensation for both men.

Thatís not all. When the inevitable shareholder lawsuits are filed against Mac íní Maeís executives, who professed until the bitter end that their companies were in fine financial shape, who might cover the costs of defending those suits?

Why, you and I, the taxpayers, silly.

And, in another twist, we may also be asked to cover the legal bills of Franklin D. Raines, the former chief executive of Fannie Mae, who was ousted after that companyís accounting scandal in 2004. Under the terms of his separation agreement, Fannie Mae paid these bills.

Late Friday, the Federal Housing Finance Agency, the new overseer of Mac íní Mae, said it might limit the payment of legal fees and exit packages if it had reason to believe the recipients committed fraud, breach of fiduciary duty, were substantially responsible for the insolvency of either entity or violated regulations. If regulators found gross negligence or willful misconduct, that would also be considered as the agency ponders whether to make these payments.

Maybe theyíll be paid, maybe they wonít. Stay tuned.

Of course, legal fees and exit packages are as nothing next to the billions in potential losses we face as taxpayers in having to guarantee bad mortgages that Mac íní Mae financed during the boom.

Those losses may also expand, because the Mac íní Mae bailout has created an interesting conflict of interest involving the financial practice of forcing entities that originated bad mortgages to take them back.

If those running Fannie and Freddie had taxpayersí interests at heart, they would be working assiduously to return as many questionable mortgages as they could to the firms who originated them (those firms that still exist, that is).

Lenders who sold loans to Mac íní Mae, after all, agreed to buy back any mortgages that involved fraudulent representations or material misstatements.

HENCE the conflict: Treasury officials might feel queasy about enforcing such buyback provisions if they further imperil troubled lenders and create more losses for banks already wobbling under mounting mistakes.

So, unfortunately, questionable loans that might have been jettisoned could well stay on the taxpayersí tab.

Given these and other downsides to the bailout, taxpayers surely seem entitled to get something in return for their Mac íní Mae ownership. That something should be more immediate than a pie-in-the-sky promise of future payoffs to the United States Treasury.

Here is a modest suggestion for James B. Lockhart, chairman of the F.H.F.A., to consider: Do the new owners ó us deep-pocketed taxpayers ó a favor, and open up Mac íní Maeís books so we can see exactly what we own.

Also, force both companies to disclose details on every mortgage they guaranteed or purchased in the last 10 years. This would include loan type, the year when the loan was made, the original rating on the security and its originator.

That way, the new owners would be able to see how deep into the subprime loan swamp Fannie and Freddie waded during the lending spree. After all, according to Inside Mortgage Finance, an industry publication, Mac íní Mae bought almost $170 billion in subprime mortgage-backed securities in 2005, roughly one-third of the total issuance that year. And they bought an additional $120 billion in subprime mortgage securities in 2006, or 27 percent of the total amount issued.

We would then see how heavily Mac íní Mae relied on such aggressive but now defunct lenders as Ameriquest, Long Beach Mortgage and New Century.

Such visuals might help keep the Mac íní Mae mess from happening again.

As the regulator of a new federal overseer, Mr. Lockhart has a wonderful opportunity to do what none of the other financial regulators have been willing to do: demand a level of disclosure that allows Mac íní Maeís new owners to evaluate the companiesí holdings accurately.

If that doesnít occur, investors and taxpayers are left to speculate about what might lurk inside these companies.

An ancillary benefit may accrue from greater disclosure. Asking Mac íní Mae to bare their books might encourage other financial institutions to be more open, too.

You see, stonewalling investors who plead for transparency while marking assets at higher values than they would fetch in a sale just does not work anymore.

If you donít believe me, ask the crew over at Lehman Brothers.


Copyright 2008 The New York Times Company




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