Bank Lawyer's Blog

More Of The Same Old Sleaze

2009-03-26T21:51:00-05:00

We once thought that Clinton appointee Franklin Raines had a sweet deal at Fannie Mae (even though he had to--kind of--sort of--pay back a wad of his "compensation"). On a per-hour basis, Franklin had nothing on current White House Chief of Staff Rahm Emanuel. Emanuel, appointed to Freddie Mac's Board of Directors by Clinton, stayed a smidge over a year at Freddie Mac, didn't serve on any of the committees where the actual work of the Board was performed, and still pocketed a cool $320,000. Even if he forced himself to attend seven board meetings (the board met only every other month) and actually stayed awake during them, what's that work out to, $46,000 an hour? Wow, even Eliot Spizer wouldn't pay that much for an hour of straight sex.

And, boy did Freddie get its money's worth of strict oversight out of Rahm ("Eagle-Eye") Emanuel!

On Emanuel's watch, the board was told by executives of a plan to use accounting tricks to mislead shareholders about outsize profits the government-chartered firm was then reaping from risky investments. The goal was to push earnings onto the books in future years, ensuring that Freddie Mac would appear profitable on paper for years to come and helping maximize annual bonuses for company brass.

The accounting scandal wasn't the only one that brewed during Emanuel's tenure.

During his brief time on the board, the company hatched a plan to enhance its political muscle. That scheme, also reviewed by the board, led to a record $3.8 million fine from the Federal Election Commission for illegally using corporate resources to host fundraisers for politicians. Emanuel was the beneficiary of one of those parties after he left the board and ran in 2002 for a seat in Congress from the North Side of Chicago.

The board was throttled for its acquiescence to the accounting manipulation in a 2003 report by Armando Falcon Jr., head of a federaloversight agency for Freddie Mac. The scandal forced Freddie Mac to restate $5 billion in earnings and pay $585 million in fines and legal settlements. It also foreshadowed even harder times at the firm.

Many of those same risky investment practices tied to the accounting scandal eventually brought the firm to the brink of insolvency and led to its seizure last year by the Bush administration, which pledged to inject up to $100 billion in new capital to keep the firm afloat. The Obama administration has doubled that commitment.

Freddie Mac reported recently that it lost $50 billion in 2008. It so far has tapped $14 billion of the government's guarantee and said it soon will need an additional $30 billion to keep operating.

The Change We Have Been Waiting For. Not.

Countrywide Condemned For Blacklisting...Again

2008-10-19T22:27:00-05:00

The hits just keep on comin' for Countrywide, don't they?

A group of appraisers in Idaho filed a class-action lawsuit Thursday against Countrywide Financial Corp. – Now, Bank of America Corp..., after its recent acquisition – claiming the company used “strong-arming tactics to intimidate appraisers to generate reports in line with Countrywide’s business objectives.”

[...]

The suit alleged Countrywide used improper appraisal techniques that benefited the lender and punished those who did not participate by blacklisting individuals and companies; in turn, causing “substantial damage to thousands of appraisers,” in addition to distorting real estate prices.
“The integrity of real estate appraisals is more important than ever and time and time again Countrywide is showing its customers and partners that it only cares about profits and market control,” said Steve Berman, managing partner at Hagens Berman Sobol Shapiro, the firm representing the appraisers. “The bottom line is our nation’s at a breaking point where we can’t take anymore corporate dishonesty in the home market…”

According to Berman, if appraisers don’t “play ball” with Countrywide by producing a report affirming the appraisal value Countrywide expects, they’re blacklisted. The suit alleged, as of Aug. 28, 2008, more than 2,000 appraisers appeared on “the list.”

The claim stated that any appraisal submitted to Countrywide from a blacklisted appraiser was automatically sent to LandSafe, who can render an appraisal “unusable” if it doesn’t fall within Countrywide’s guidelines. The claim called LandSafe a “captive puppet” of Countrywide, enabling their unethical business practices.

And according to the complaint, Countrywide has been using the blacklist practice for more than four years.

The complaint states the plaintiff, Capitol West Appraisers, refused to succumb to Countrywide’s alleged pressure — as a result, the company was placed on the list.

The allegations are reminiscent of those made by appraiser Jennifer Wertz settled against Wamu not long ago, which also alleged blacklisting by another major mortgage lender when an outside appraiser (Wertz) refused to "play ball" with the lender's (Wamu's) desire for whatever appraised value supported the loan it wanted to make, "fair market value" be damned. With what happened subsequently to Wamu, I'd say Jennifer settled her lawsuit at a prime time, notwithstanding snide remarks by some appraisers that she "took the money and ran." If she did, "good on her." We also discussed a lawsuit filed last January in Houston by a former employee of a Countrywide unit, who alleged that he'd been fired for blowing the whistle on Countrywide's alleged practice of pressuring outside appraisers to inflate appraised values. None of this was news to outside appraisers.

New York Attorney General Andrew Cuomo negotiated a Home Valuation Protection Program and Cooperation Agreement with OFHEO, Fannie Mae and Freddie Mac, in accordance with which a Valuation Code of Conduct was to take effect January 1, 2009. According to Appraisal Scoop.com, that adoption date has been pushed off one to three months. The HVCC was supposed to stop these types of abuses. Insiders have their doubts. Others predict it may spell the end of the independent real estate appraiser.

We're the government. We're here to help you.

Staying "Bought"

2008-05-21T22:24:00-05:00

It's amusing to watch Senators Dodd and Shelby tout their special interest bailout plan as a clever means to get maybe half a million borrowers (and perhaps their lenders, even after the required "haircut") some relief from having to suffer the consequences of their poor decision-making capabilities, without putting the US taxpayers at risk, by palming off the risk on Freddie Mac and Fannie Mae. As if the "implicit" guaranty of the full faith and credit of the United States wouldn't come into play if either Freddie or Fannie were to suffer a serious setback because subprime borrowers turn out to be as subprime in new loans as they were in their existing loans.

Fannie and Freddie aren't doing cartwheels about this variation on a theme by Barney, either.

Freddie Mac is nervous about the direction the bill might take. Company spokesperson David Palombi said if the bill is "not applied carefully" it could make the troubled U.S. mortgage market even worse.

Palombi said it is "essential" to that the legislature doesn't raise capital requirements to where Freddie can't fulfill its mission to help stabilize the U.S. mortgage market and be good to its shareholders. Both Freddie and fellow government-backed lender Fannie Mae have had their required lending capital cushions slashed to 15.0% of assets, over statuatory minimums, from 30.0%, in the last eight weeks...

Brian Faith, a Fannie Mae spokesperson, said Friday that Fannie is all for the part in the legislation on deck that creates a "stronger, independently funded, bank-like regulator" to ensure that that the two companies behave themselves. Faith added that the legislature needs to "take into account the financial condition of the companies over time."

In other words, by raising capital requirements, the bill would reduce both Fannie's and Freddie's ability to leverage capital, and this, in turn, might impede their ability to borrow to the extent necessary to both fund the bailout and fulfill their stated purpose: provide liquidity to the mortgage market that serves most borrowers, the responsible kind, the "prime kind." You can see why the GSEs are starting to perspire a little bit, but I can't imagine that Dodd, Shelby or any other senator or congressman is worried about the long term risk or impact. They're worried solely about November 2008, and what happens in the voting booths around the nation on the first Tuesday of that month.

Politicians. Well, they may be bozos, and they may be failing the voters, but there's some cold comfort in the fact that they're failing their real constituency, as well, and that that constituency might decide to eliminate "the middle man" and go straight to you and me. That eventuality would be worthy of the name "campaign finance reform."

Fannie's Fraud Action Fizzles

2008-04-21T22:43:00-05:00

As Rod Stewart sang, "Some guys have all the luck." Certainly, Franklin Raines and Timothy Howard appear to be "fortunate sons."

In August 2006, the Department of Justice dropped criminal investigations against the two former Fannie Mae officials. Last week, the OFHEO announced that the two men, along with the company's former controller, Leanne Spencer, had agreed to pay some relatively minor fines and to give up some worthless stock options, in return for a full settlement of allegations that they had conspired to inflate Fannie Mae's earnings in order to pump up their compensation.

Raines is paying $24.7 million, including a $2 million penalty and the forfeiture of stock options, the Office of Federal Housing Enterprise Oversight said in a statement today. Former Chief Financial Officer Timothy Howard will surrender $6.4 million, and Leanne Spencer, who was the Washington-based company's controller, was fined $275,000.

That might sound like a lot of money to most of us, until you compare it to what OFHEO alleged was its damages when it commenced administrative proceedings against these individuals.

The settlements, short of the $215 million in damages sought by Ofheo, ends more than a year of fighting with the executives over who was responsible for $6.3 billion in misstatements at the government-chartered company. Fannie Mae insurance will pay the $3 million cash portion of the settlements.

Note that the defendants don't come out-of-pocket for the cash settlement, the insurance company does. Therefore, the defendants must be giving up something very valuable other than cash as part of the over $32 million that the defendants are "paying" or "giving up," right? Not so fast.

Raines will pay a $2 million fine to the federal government [Ed: paid for by insurance]; relinquish claims on stock options valued at $15.6 million when they were issued; donate $1.8 million in proceeds from the sale of Fannie Mae stock to charitable programs that help struggling homeowners; and forfeit about $5.3 million in other benefits that Ofheo didn't disclose.

Raines was given stock options in 2000 through 2003 for 932,000 shares at exercise prices ranging from $69.43 to $80.95 a share. After he left, the shares never rose above $72 and now trade at less than $30, signaling any options he relinquished would be worthless.

In addition to the insurance company covering the cash, the stock options are worthless, yet constitute $15.6 million of the $24.7 million Raines is "paying" to settle the lawsuit. Another $5.3 million consists of foregone "undisclosed benefits" that Raines never received, but that he arguably has a right to claim.

Howard's $750,000 fine will be covered by insurance. He will surrender $5.2 million in stock options, donate $200,000 in proceeds from stock sales to charity and forfeit other benefits valued at $240,000, Ofheo said.

Again, less than impressive, isn't it?

The defendants' counsels claimed victory, and I don't blame them. Although shareholder litigation against these individuals is pending, today's The Wall Street Journal notes that such litigation is also likely to end in a settlement. On the other hand, the defendants have to pay their lawyers, which ought to put a dent in their wallets. Moreover, the WSJ also alleges that "the careers of Messrs. Raines and Howard were shattered." Perhaps. One thing this country's good at is giving people a second chance (assuming, unlike, say, Ken Lay or Jeff Skilling, you stay out of jail and/or don't drop dead). I wouldn't be surprised to see one or more of these individuals make a come-back.

Maybe Donald Trump will transform them.

Fire Away

2008-01-17T15:54:21-06:00

Readers continue to send e-mails that contain ~~death threats~~ constructive criticism of an errant bloviation that appeared on this blog or ~~brain-injury-inflicting~~ thought-provoking questions concerning a topic about which I ~~don't give a damn~~ haven't yet blogged.

Hank Brown ~~called me a dumb-ass for~~ took issue with a recent post in which I agreed with the contention of a former RTC employee that the only people who were bailed out by the FSLIC and FDIC during the S&L "bailout" of the late 1980s and early 1990s were insured depositors. Hank stated that it was his understanding that many uninsured depositors were also "covered" in the bailouts, and that many, if not most, of them got their money back. I don't have the figures at hand and I ~~would rather shove a hot poker through my left ear drum than~~ don't have the time to research the issue, but I think that Hank is correct. If I recall correctly (given the fact that my alcohol-soaked brain fires on only two cylinders), most of the S&L bailouts of that period were variations of a purchase and assumption transaction structure in which all deposits of the failed institution, insured and uninsured alike, were transferred to a purchasing institution (in many cases, a new one created by an investor group), along with a portion of the assets. Therefore, the uninsured depositors got their "bets" covered right along with the insured depositors. It doesn't negate my point that the "millionaires" who owned the bank were "wiped out," not "bailed out," but it does mean that true "market discipline" was not imposed on all the players.

I should never have been so hasty as to quickly agree with a former RTC employee. At least, I should have waited until I'd ~~come down off the cocaine I'd ingested~~ given the topic some more consideration. Of course, if I actually thought about what I wrote, I'd never have time to write. After all, I bill by the hour, and time spent blogging is "down time."

Another reader, Mary Kay Gaver, wrote to ask me what I thought about FNMA's 0.25% Adverse Market Delivery Charge, and other risk-based pricing changes, that take effect for deliveries of "prime loans" after March 1, 2008. Freddie Mac has announced that it's following suit. She thought that the fees seemed like "a bit of bail out of FNMA being funded by new borrowers and a charge being imposed by FNMA for folks seeking to refinance out of adjustable rate loans." I know that the National Association of Home Builders also believes that the fees are a de facto recapitalization of FNMA and FHLMC caused by the failure of Congress to legislate OFHEO reform, and that's a plausible accusation. However, I think it has more to do with what blogger Dan Green called "corners getting cut" in prime mortgage loan underwriting. He used the term not in its usual context (taking a shortcut around prudent underwriting), but to mean snipping away the looseness of previous underwriting standards, tightening underwriting, and pricing loan rates and fees on the basis of "perceived" risk.

In other words, they're scared of the unknown, and they're trying to charge for the "perceived" risk when their perception is telling them "I'll be damned if I know how bad things will be!" In fact, they may be underpricing the risk if the bears are right about how bad this recession that is coming is going to be. The acid test of motivation will come when conditions turn upward again in residential real estate markets, and how quickly FNMA and FHLMC then roll back these fees and pricing adjustments. If they cling to the fees like a needy lover who simply won't let you have one damn night out bowling with The Dude, Walter and Donny, you'll know that these quasi-public entities are nothing more than egg-sucking dogs. Until then, we'll merely consider them "fraidy cats."

Finally, reader Brooks Talley supplemented his comment with an e-mail poking fun at my post on the heart-burning topic of "baking" law. His taunts about my typo brought raucous laughter from my wife, so all's well that ends well. The "baking" reference did remind me of the "deep thoughts" of evangelist Franklin Graham:

"When you die, if you get a choice between going to regular heaven or pie heaven, choose pie heaven. It might be a trick, but if it's not, mmmmmmm, boy."
---Franklin Graham, as told to Jack Handy

Tip of the Iceburg?

2007-11-12T22:31:00-06:00

For all the little-girl-like whining that occasionally whimpers forth from the panty-waists who write this blog about tin-foil-hat-wearers who contact us, we have to admit that the majority of the contact we receive is interesting and sometimes downright enlightening. Yesterday's post on Andy ~~Hardy's~~ Cuomo's publicity-hounding over WaMu's alleged coercion of appraisers, generated a couple of contacts of the latter sort. One reader pointed me to a recent article that reports that class action attorneys--Errrrpp! Sorry, I just spit up a little bit in my mouth; let's try this again--attorneys have already filed a class action lawsuit against WaMu over the appraisal practices alleged by Cuomo's office to have occurred.

Wolf Popper LLP has filed a class action lawsuit against Washington Mutual, Inc. ("Washington Mutual") and certain of its officers and directors in the United States District Court for the Southern District of New York, on behalf of investors who purchased Washington Mutual common stock on the open market from July 19, 2006 through October 31, 2007 (the "Class Period"). This is the first action filed against Washington Mutual and alleges claims for securities fraud. The case has been assigned Civil Action No. 07 Civ. 9801.

The complaint charges that during the Class Period Washington Mutual improperly exerted pressure on a third-party appraisal firm, eAppraiseIT (a division of the First American Corporation), to inflate the appraised value of homes used as collateral for loans originated by Washington Mutual. Washington Mutual failed to disclose this scheme, which violated federal and state laws and regulations requiring an independent appraisal process. The inflated appraisals caused Washington Mutual's financial results to be misstated, including causing its loan assets to be overstated while its provision for doubtful accounts and reserves for loan losses were materially understated.

As regular readers understand, I usually have the same regard for class action attorneys as I do for members of Al-Qaeda. I admit that's based purely on the personal prejudices of a bank lawyer whose career has been spent on the other side of the firing line. Therefore, I reserve the right to change my mind in any specific instance where the evidence reveals that the bank's conduct was clearly improper. The civil lawsuit should at least complement the investigations of the State of New York, the OTS and the OFHEO in uncovering any such evidence, just in case the federal and state agencies get into a not-so-untypical hissy fit over turf-protection and "You think you have a big one, well, let me show you mine!" We'll see what develops.

Perhaps even more interesting is word of a lawsuit that alleges wrongful termination by WaMu of an employee and that was filed over a year ago. The plaintiff is a former internal credit analyst for WaMu.

Washington Mutual Inc. (WM) is the target of a wrongful-termination suit filed in the Superior Court for the Orange District-Central Justice Center. The law office of Joseph M. Lovertovich, which is representing the former employee, alleges the Seattle-based financial-services company terminated a staff internal analyst who reported supposed internal Bank of Code Conduct violations to upper management.

[...]

The law office specifically alleges the analyst was directed not to downgrade a loan by a senior officer at the company to enable the bank to continue doing business with a large mortgage client, which the employee refused. The law firm claims that another credit officer employed by the bank was then told to misrepresent the loan value. The firm said the alleged manipulation by the bank employee prevented the $5-million commercial loan transaction's risk rating from being downgraded. The terminated analyst also said the bank carried a $6 million investment on its books that was actually worthless.

It's my understanding that the former employee's suit has been converted to an arbitration proceeding, which will be conducted later this year. Obviously, until all the evidence is in you have to give WaMu the benefit of the doubt. Nevertheless, as I observed yesterday, my personal experience with pressures exerted by large lenders on residential real estate appraisers who tried to render honest appraisals, and my experience with similar pressures faced by internal credit analysts at commercial banks and other financial institutions whose delivery of bad news is often taken poorly by managers whose oxes are being gored, lead me not to dismiss these allegations out-of-hand. I'll be following them closely.My ire was raised by Cuomo's (and his big brother Spitzer's) grandstanding and, I think, their less-than-effective tactics, not by the underlying merits of the investigation.

WaMu is by far the largest federal thrift, and, if the evidence that is revealed supports the contention that WaMu retaliated against honest appraisers and credit analysts, and that these allegations have been around for some time, an additional question will be asked as to what the OTS knew and when did it know it. If it didn't know about it, why was it ignorant? Remember, the OTS is trying to sell itself as the primary federal regulator of previously unregulated mortgage lenders. I've already received snarky comments via e-mail from certain state banking regulators about the OTS in this regard, and if these proceedings support the allegations made against WaMu, the OTS may be next in the hot seat, with a lot more critics than a few state banking regulators.

Commie or Clown?

2007-11-11T22:42:00-06:00

You can't leave town for a few days without another Attorney General roiling the mortgage and stock markets with another press conference, with plenty of photo opportunities, held solely to further his political career by sticking his nose into places where his brain is incapable of following. In the process, he, and the hand that manipulates the sock puppet that everyone knows he is, get to take shots at Fannie Mae, Freddie Mac, and the federal banking regulators. In other words, just another normal day in the "Empire State."

New York Attorney General Andrew Cuomo subpoenaed Fannie Mae and Freddie Mac as he expanded his investigation into "widespread" collusion between real estate appraisers and lenders including Washington Mutual Inc.

Cuomo is seeking information on whether home loans purchased by Fannie Mae and Freddie Mac, the two biggest investors in U.S. mortgages, were based on tainted property appraisals. Investment banks were also subpoenaed, he said, declining to name them.

As with all spin doctors, Cuomo's working hard to dramatize the crucial importance of his publicity stunt as the turning over the first of many rocks, under each of which will be a nest of worms and grubs known as "Mortgage Lenders" [hack, expectorate].

"I don't believe it's just about Washington Mutual,'' Cuomo said at a press conference in Manhattan today. "I believe it's widespread. I believe it's the rule not the exception. And we're investigating Fannie Mae and Freddie Mac and other investment banks as to the underlying practices that have allowed this to go on for so long.''

And the basis for his belief? Well, just because. He doesn't say. Obviously, if it's merely WaMu, then the drama factor isn't as great as it would be when the entire mortgage lending industry is unmasked as being rife with mortgage appraisal fraud. Cuomo ought to be able to drag this puppy around by a leash for years.

As expected, Fannie and Freddie were so impressed by Cuomo and his tactics that they immediately gave him the finger. OFHEO Director James Lockhart's official response to Cuomo drips with condescension. Basically, Lockhart's calling Cuomo and his staff ignorant about mortgage backed securities and the way the GSE's work with lenders, and is also accusing Cuomo of not being interested in solving any actual problems that it uncovered, inasmuch as Cuomo's office didn't bother to even notify the OFHEO, which oversees both GSEs, before it issued its subpoenas. Obviously, if OFHEO was involved, the problem, if it exists, might very well have been remedied before Cuomo got an opportunity to hold a press conference. Freddie and Fannie also stated that they intended to keep on buying loans from WaMu.

Adding to the theater of the absurd aspect of the affair was nutbag Jim Cramer's public (and obviously contrived) meltdown in which he called Cuomo a Communist.

You have to love it when Cramer's partner in crime observes that Cramer never called out Cuomo's predecessor (and role model) Eliot Mess and Cramer's defense is that Spitzer's his friend! Credibility Alert!

The real problem with accusing Cuomo of being a commie is that communism as an intellectual construct requires a degree of intelligence to understand and follow, even if it's right into the brick wall which is reality and the judgment of history. Cuomo hasn't got the intellectual horsepower to get it. His system of belief is firmly rooted a politician's "Will to Office." That's as deeply philosophical as he gets.

Spitz and Andy held a press conference (of course) to address Cramer's accusations. Spitz said he would give Cramer a call "and straighten him out." I think he meant by use of The Rack. Andy just laughed like a goof ball. Spitz got in a quick shot at the federal banking regulators and the effect of his expensive and repeatedly futile efforts to overturn federal preemption principles. All-in-all, you'd think that maybe Cramer engineered the entire dust up as a favor to his former Harvard Law School classmate.

The sad aspect is that Cuomo may actually be on to something. During a previous banking crisis, widespread real estate appraisal fraud was uncovered and a number of appraisers were sued and/or imprisoned for fraudulent practices. Also, I have personal experience in representing residential appraisers who were removed from a large financial institution's list of approved appraisers because their valuations were "too conservative." The lender was regulated by a federal banking regulator that was completely uninterested in following up on the accusations. I have no idea whether WaMu is guilty of anything, or if Cuomo's intimations of widespread fraud have any basis. I'm merely saying that if any of this smoke leads to the discovery of a fire, I would not suffer an immediate myocardial infarction caused by the shock of the revelations.

The cynical side of me, however, questions the failure of Cuomo to involve the OFHEO, and to first work behind the scenes to investigate the alleged abuse and any role Freddie and/or Fannie might have played, or any light their records could have thrown on any lender's practices. Moreover, there is no discussion by Cuomo of the OTS being consulted by Cuomo's office, and late last week, the OTS stated that it had not been contacted by Cuomo.

Complicating the issue is that Cuomo is running into criticism from the Office of Thrift Supervision, which regulates WaMu, as well as a separate federal agency that oversees Fannie and Freddie. The OTS said Thursday it is investigating Cuomo's charges against WaMu, but added, "At this time, the OTS has not been contacted by the New York Attorney General's Office regarding this matter, including the basis for these allegations. We look forward to learning more about the NYAG's investigation."

You'd think that WaMu's primary regulator would have easy access to WaMu's records, if getting at those records was your priority. This further supports the conclusion that this is merely a cheap publicity stunt designed more to pump up Cuomo's career than to effectively remedy an alleged abuse. If there actually is abuse that needs to be ended, this process doesn't seem designed to actually end it. It does seem designed to feed the need for press by yet another political hack.

Fannie Mae: Not Out of the Woods Yet

2006-08-29T04:20:00-05:00

From Paul Muolo's column "What We're Hearing" in this past weekend's National Mortgage News:

Well, it looks as though former Fannie Mae officials won't be doing a 'perp walk' after all. In case you were at the beach this past week, the Department of Justice informed the Congressionally chartered mortgage giant that it has discontinued its investigation of the GSE in regard to its $10.6 billion accounting scandal. No criminal charges will be brought against the company at all. The obvious question is this: does that mean charges might be brought against any individuals, as in former top officers? DOJ will not confirm or deny that any individuals were ever the subject of a criminal probe in the case. And if the "accounting side" of the investigation has been discontinued that would imply that no charges will be brought whatsoever against individuals. In other words, former chairman and CEO Franklin Raines, and former chief financial officer Timothy Howard can start sleeping at night again. Of course, DOJ is still investigating whether the two men perjured themselves before Congress in the fall of 2004 when they denied manipulating accounting rules to make earnings targets. By dropping the probe does that mean DOJ believes that no manipulation occurred? Or was it "civil" manipulation versus, say, "criminal" manipulation. Whatever the case, DOJ's decision to scuttle the investigation can be viewed as a major victory for Messrs. Raines and Howard. Their contention that the whole accounting mess was merely a disagreement over arcane FASB rules no longer looks so suspect. It also could hurt civil cases being brought against the company. Stay tuned...

I have no inside (or even outside) information on whether or not Franklin Raines or Timothy Howard will ever face criminal charges for their part in the Fannie Mae accounting scandal. However, as reported by Bloomberg News and others late last week, "the SEC is still weighing civil charges against individuals," so their wallets are still at risk if not their liberty. Also, as I discussed a couple of months ago, Franklin Raines has been accused by at least one U.S. Congressman of having perjured himself in testimony before the House. I agree with Mr. Muolo that it's looking less likely that fraud charges will be brought by the DOJ, but I'm not ready to throw in the towel on that possibility yet, and even less so regarding perjury charges, if Congress wants to push it. It's perhaps merely wishful thinking on my part. After all, Congress couldn't nail Raphael Palmeiro for testifying "I have never used steroids. Period" six weeks before he failed a steroids test. If they can't bring that guy to justice, then Raines may very well skate.

Perjury's a tough crime to prove. There was one guy I read about some years back who claimed in the course of a videotaped deposition that he never had sexual relations with a particular woman when, in fact, he'd had not only relations with the woman but with a cigar that had kept company with her. Waste of a good cigar, if you ask me, but regardless, it caused some kind of hoopla or another, Congress got involved, but they couldn't make the case stick. At least, that's what I recall, although the details are murky.

I think that case proved two things: (1) Even if you lie on camera, your best course may be to brazen it out; and (2) when forced to choose between a bad woman and a good cigar, the answer is not always obvious, even to a perjurer.

THE BETROTHED
---Rudyard Kipling

"You must choose between me and your cigar."
BREACH OF PROMISE CASE, CIRCA 1885.

Open the old cigar-box, get me a Cuba stout,
For things are running crossways, and Maggie and I are out.

We quarrelled about Havanas — we fought o’er a good cheroot,
And I knew she is exacting, and she says I am a brute.

Open the old cigar-box — let me consider a space;
In the soft blue veil of the vapour musing on Maggie’s face.

Maggie is pretty to look at — Maggie’s a loving lass,
But the prettiest cheeks must wrinkle, the truest of loves must pass.

There’s peace in a Larranaga, there’s calm in a Henry Clay;
But the best cigar in an hour is finished and thrown away –

Thrown away for another as perfect and ripe and brown –
But I could not throw away Maggie for fear o’ the talk o’ the town!

Maggie, my wife at fifty — grey and dour and old –
With never another Maggie to purchase for love or gold!

And the light of Days that have Been the dark of the Days that Are,
And Love’s torch stinking and stale, like the butt of a dead cigar –

The butt of a dead cigar you are bound to keep in your pocket –
With never a new one to light tho’ it’s charred and black to the socket!

Open the old cigar-box — let me consider a while.
Here is a mild Manila — there is a wifely smile.

Which is the better portion — bondage bought with a ring,
Or a harem of dusky beauties, fifty tied in a string?

Counsellors cunning and silent — comforters true and tried,
And never a one of the fifty to sneer at a rival bride?

Thought in the early morning, solace in time of woes,
Peace in the hush of the twilight, balm ere my eyelids close,

This will the fifty give me, asking nought in return,
With only a Suttee’s passion — to do their duty and burn.

This will the fifty give me. When they are spent and dead,
Five times other fifties shall be my servants instead.

The furrows of far-off Java, the isles of the Spanish Main,
When they hear my harem is empty will send me my brides again.

I will take no heed to their raiment, nor food for their mouths withal,
So long as the gulls are nesting, so long as the showers fall.

I will scent ‘em with best vanilla, with tea will I temper their hides,
And the Moor and the Mormon shall envy who read of the tale of my brides.

For Maggie has written a letter to give me my choice between
The wee little whimpering Love and the great god Nick o’ Teen.

And I have been servant of Love for barely a twelvemonth clear,
But I have been Priest of Cabanas a matter of seven year;

And the gloom of my bachelor days is flecked with the cheery light
Of stums that I burned to Friendship and Pleasure and Work and Fight.

And I turn my eyes to the future that Maggie and I must prove,
But the only light on the marshes is the Will-o’-the-Wisp of Love.

Will it see me safe through my journey or leave me bogged in the mire?
Since a puff of tobacco can cloud it, shall I follow the fitful fire?

Open the old cigar-box — let me consider anew –
Old friends, and who is Maggie that I should abandon you?

A million surplus Maggies are willing to bear the yoke;
And a woman is only a woman, but a good Cigar is a Smoke.

Light me another Cuba — I hold to my first-sworn vows.
If Maggie will have no rival, I’ll have no Maggie for Spouse!

Fannie Gets Spanked

2006-07-14T05:28:00-05:00

Six months ago, Fannie Mae pined for expanded authority to make residential acquisition, development and construction loans, and banks and thrifts quivered with angst. Well, angst no more, my little brothers, because yesterday Fannie Mae announced that under pressure from the OFHEO, it had agreed to suspend its ADC lending program. Not only won't it expand the program, it's shutting it down.

OFHEO itself had received some political pressure about the program. According to the Dow Jones Newswire article linked above:

On June 22, two Republicans in the House of Representatives sent a letter to OFHEO Director James B. Lockhart raising concerns about the Fannie Mae program.

"This ADC venture may be even more problematic than under routine circumstances because Fannie Mae may be seeking to exploit a 'window of opportunity' caused not only by Congressional deliberations over a new regulator, but also because of its ability to launch a new business without clear market disclosures of the costs of entry or the resulting profitability - or lack thereof," wrote Reps. Jeb Hensarling of Texas and Ed Royce of California.

"Or lack thereof." Ouch!

OFHEO Director James Lockhart piled on.

"My view really is, some of the people there are still more of the idea that 'We should be out creating all sorts of new products, increasing our portfolios dramatically,'" he said. "We know that they don't have the capability to do that. To me, that's a little arrogance."

Ah, those lobbying efforts of Fannie Mae really have paid off, haven't they?

Fannie Mae's Solo Solon

2006-06-12T05:09:00-05:00

A commenter to a previous post on the foibles of Fannie Mae took the position that hard-core lobbying efforts of Fannie Mae officials prevented OFHEO officials from uncovering the accounting scandal that led to the ouster of Fannie Mae's top management and restatement of earnings. He or she contended that lobbying by GSEs should be banned.

A story in this past weekend's edition of National Mortgage News supports that contention.

In a last-ditch effort to distract attention from its accounting problems, Fannie Mae used its clout on Capitol Hill to "undermine" and "discredit" a special examination of its books, according to a report by the Office of Federal Housing Enterprise Oversight.

Moreover, last week former OFHEO chief Armando Falcon Jr. said Fannie's behavior reminded him of the "Keating Five" scandal of the late 1980s when five U.S. senators pressured thrift regulators to go easy on his rogue S&L.

Speaking at a luncheon here, Mr. Falcon said he found it "particularly offensive" that Fannie instigated an inspector general probe of his agency by the Department of Housing and Urban Development. (Mr. Falcon left OFHEO on his own accord in May 2005.

[...]

As OFHEO's special examination was getting underway in early 2004, Fannie worked with a powerful Senate appropriator to launch an investigation of OFHEO by HUD's IG office.

The OFHEO report documents that Fannie lobbyist Duane Duncan -- with the approval of higher-ups -- instigated the request and drafted a letter for Sen. Christopher Bond, R-Mo., to send to HUD IG Kenneth Donohue.

The letter asked the IG to investigate several "leaks" that OFHEO allegedly had made to the press that proved damaging to Fannie.

Mr. Duncan admitted under oath that "Fannie Mae had generated the request" for the HUD IG investigation, according to OFHEO's final report on Fannie's accounting scandal.

"It is clear that Fannie Mae sought to use the ... investigation of OFHEO by the HUD inspector general to attempt to undermine the special examination," the OFHEO report says.

OFHEO also reported that Fannie lobbyists wanted to use the VA-HUD appropriations bill to pressure the Bush administration to replace OFHEO director Falcon, and his deputy, Stephen Blumenthal, who was leading the special investigation.

As the chairman of the VA-HUD Appropriations Subcommittee, Sen. Bond included language in OFHEO's $60 million budget that penalized the agency if Mr. Falcon remained at the helm.

[...]

Sen. Bond's subcommittee approved S. 2825 on Sept. 21, 2004 -- the same day that Fannie Mae reported a $3,500 political action committee contribution to Sen. Bond, who was running for re-election.

A Center for Responsive Politics report prepared for NMN also shows that then-Fannie chairman and chief executive Franklin Raines made a personal $1,000 contribution to Sen. Bond in November 2003.

The current CEO and president, Daniel Mudd, contributed $1,000 to Sen. Bond in 2003.

Sen. Bond continued to call for Mr. Falcon's removal after the HUD IG released the results of its investigation in mid-November of 2004. "Administrator Falcon's term expired six weeks ago. He should be gone by now," Sen. Bond said in a Nov. 19, 2004 statement.

The IG report raised serious questions about the conduct of Messrs. Falcon and Blumenthal. However, the IG concluded that OFHEO did nothing wrong.

[...]

Two weeks ago, Fannie agreed to a $400 million settlement with the SEC and OFHEO for engaging in financial fraud.

Those of us who represented savings and loans in the 1980s certainly recall the infamous Keating Five. Although Senator John McCain was one of "The Five," he survived the scandal relatively unscathed. However, in his autobiography, he considers his participation in the group one of the worst mistakes of his career.

In this case, it appears that there was at least a "Fannie Mae One": Senator Christopher "Kit" Bond of Missouri.

Here's a list from Senator Bond's biography on Wikopedia, under a section entitled "Actions as Senator":

In 2004, Bond sent a letter asking the Department of Housing and Urban Development's inspector general to investigate whether the Office of Federal Housing Enterprise Oversight (OFHEO) had improperly leaked confidential information about Fannie Mae, which OFHEO regulates. In 2006, OFHEO investigators found a draft of Bond's letter seeking the probe of OFHEO on a Fannie Mae computer system nearly two weeks before the actual request was sent to HUD's inspector general.

On October 5, 2005, Bond was one of only nine Senators to vote against the Interrogation Limits bill, which strictly defines the methods of interrogation that can be used by US forces.

On March 28, 2006, Bond voted against creating the Office of Public Integrity, which would have looked into charges of corruption by lawmakers.

Not what he'd want written as his epitaph, I'm sure.

As I stated previously, this little scandal is far from played out.