Fannie mae scandal. 7 Things You Need to Know About Fannie Mae and Freddie Mac 2022-10-26
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The Fannie Mae scandal, also known as the Fannie Mae accounting scandal, was a financial scandal that came to light in 2004 and involved the Federal National Mortgage Association (Fannie Mae), a government-sponsored enterprise (GSE) that was created to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS). The scandal resulted in the dismissal of Fannie Mae's CEO Franklin Raines and the restatement of more than $6.3 billion in earnings from 2001 to 2004.
At the heart of the scandal was the manipulation of Fannie Mae's earnings to meet Wall Street expectations and maximize executive bonuses. Fannie Mae's management, including Raines, was accused of using accounting tricks to hit earnings targets, such as delaying the recognition of certain expenses and using derivative financial instruments to hedge the company's mortgage portfolio. The company's accounting practices were found to be in violation of Generally Accepted Accounting Principles (GAAP).
The scandal had significant consequences for Fannie Mae and the broader financial market. Fannie Mae was fined $400 million by the Office of Federal Housing Enterprise Oversight (OFHEO) and was required to restate its earnings from 2001 to 2004. Raines and other top executives were forced to pay millions of dollars in fines and settlements. The scandal also contributed to a decline in confidence in the financial markets and the bursting of the housing bubble, which led to the global financial crisis of 2008.
The Fannie Mae scandal serves as a cautionary tale about the dangers of corporate greed and the need for strong oversight and regulation in the financial sector. It also highlights the importance of ethical leadership and the need for corporate executives to prioritize the long-term health and stability of their companies over short-term gains.
7 Things You Need to Know About Fannie Mae and Freddie Mac
The Securities and Exchange Commission should not come in when the water is already spilled. What do Fannie Mae and Freddie Mac do? It wasn't long before Fannie and the administration were effectively at war. However, the executives at Fannie Mae have really been leveraging the prized deal which the Congress gave them to have the maximum profits, helping themselves with massive bonuses, and defending their valued congressional charter at all costs. History has a way of constantly repeating itself. The Alt-A loans that drove their losses were typically made to higher-income households and thus did not qualify for the affordable housing goals. The entire financial system depends on trust. Other critics looked at that portfolio and saw huge potential risks--risks that would likely be borne by taxpayers if anything went wrong.
The findings came after Fannie Mae's regulator cited it for serious accounting problems and accused it of manipulating earnings. However, other critics in D. Another question that has been lost in the political wrangling is whether Fannie's business has changed permanently for the worse. Under Raines, Fannie began to come under increasing criticism--and it responded ever more aggressively. Fannie execs felt they couldn't afford to lose even one fight, because that would open the floodgates.
One of the reasons why Fannie Mae managed to continue with its fraudulent activities was its assumption of a simplified method of hedge accounting. The President was there to unveil an initiative aimed at helping 5. It is the onerous duty of the Congress to substantiate the reasons for its apathy on the whole issue which led to the likes of Fannie Mae to have unregulated control on one of the most crucial segments of our economy without seemingly any checks and balances. Most experts agree that this highly beneficial product would largely disappear without a government guarantee. Office of Public Affairs, United States Department of the Treasury. There should be no question about our accounting.
It hires people for their political juice, including Duane Duncan, former chief of staff of Republican Congressman Richard Baker of Louisiana a Fannie critic, as it happens , Michele Davis a former Paul O'Neill aide , and Robert Zoellick, who is set to become deputy secretary of state. Fannie's duration gap made it clear that the company had been on the wrong side of interest rate bets during a period of rapidly declining rates in the fall of that year. And to make clear that this implied connection to the federal government is really not as tight a connection as most people assume. Remember how, 10 years ago, U. Later in 2003 the administration signaled its support for the agency by pointedly adding it to the President's corporate fraud task force. Freddie, started in 1970, offered shares to the public in 1989. The posts are now vacant.
Fannie Mae Fined $400 Million for Accounting Manipulations
However, the greater threat from the eurozone debt crisiscreated a flight to safety. What, they asked, did Fannie's ever-growing portfolio do to lower mortgage rates? In August 2012 the Treasury decided it would send all Fannie and Freddie profits to their fund rather than simply collecting a 10% dividend. The company receives cash at the time when refinancing happen, but a mismatch happens between its assets and future liabilities, namely the agency securities it has issued. Fannie had one last card to play. The Fannie story is not like other accounting scandals, though. The bailout kept Fannie, Freddie, and the American housing market functioning.
And he had no choice really but to leave. Unfortunately, it was too little and too late. Indeed, the most significant sector of the U. But the whole arrangement—which benefits executives, mortgage bankers, politicians, and homeowners—relies on sophisticated people convincing themselves and others that things are not necessarily what they seem. Raines graduated from Harvard and Harvard Law, became a Rhodes Scholar, interned in the Nixon White House, and served in the Carter administration before leaving government to become a partner at Lazard Frères. In fact, Fannie and Freddie lost market share as the bubble grew: The companies backed roughly half of all home-loan originations in 2002 but just 30 percent in 2005 and 2006. Yet, the expression evangelical signifies more than just adherence to a doctrinal statement.
Although the report had only been finished the previous day, and wasn't public, it was clear at the hearing that some members of Congress had already been briefed on it. It has been clearly stated in the Bible that prior to the fall, God designed human work to have two main characteristics: in the first place, it must echo the creativity of God. Franklin Delano Raines is a prominent Democrat, but that hadn't kept him from currying favor with the new Republican President. This contributed to a decline in underwriting standards and was a major cause of the financial crisis. Lenders also have an added incentive to offer safe and sustainable products—namely long-term, fixed-rate mortgages—because they know Fannie and Freddie will likely purchase them. Denmark is the other, by the way.
Fannie Mae Scandal: The rise and fall of Franklin Raines
But we also recognize that we have a long road ahead of us. Bob Simpson, who heads the South Dakota office, was an aide to Democratic Senate leader Tom Daschle, for instance. Raines would have been far better served by compromising when he had the chance. Thanks in large part to this growth, Fannie has had double-digit profit gains for the last 17 years--and an average return on equity of 25%. It was more like a wary marriage of convenience. In order to avoid such an occurrence in the future, it is important that stiffer measures be put in place requiring full and fair disclosure of all the relevant information regarding the companies. The federal government must continue to play a key role in the housing market, regardless of whether it works through Fannie and Freddie, a new agency, or purely private firms.
It borrows in the debt markets by selling bonds, and provides liquidity to loan originators by purchasing whole loans. The White House didn't want to be dragged into another business scandal--not after Enron. It also buys and sells the mortgage-backed securities it produces—and derivatives based on them—as part of an effort to hedge its risks. Top Content in the Last 2 Days by Page Views by Steven Jonas With membership, you can by Robert A. And that in avoiding those losses, Fannie's top executives collected millions in bonuses they didn't earn. There are plenty of people who still believe that what's good for Fannie is good for home-ownership--and that the whole thing was little more than a political dirty trick.
