Fannie Mae seems to have had a wealth of troubles which ultimately led to its downfall. One source of those troubles were political appointees installed in the ’90s. Here are some details:
Perhaps some of you may not remember what Fannie Mae was caught doing after a whistleblower exposed the fraud (and was fired in retaliation). It was obvious that the books at Fannie Mae were being cooked:
The magnitude of Fannie’s machinations is stunning, and in two key areas in particular they deserve to be better understood. By improperly delaying the recognition of income, it created a cookie jar of reserves. And by improperly classifying certain derivatives, it was able to spread out losses over many years instead of recognizing them immediately.
In the cookie-jar ploy, Fannie set aside an artificially large cash reserve. And — presto — in any quarter its managers could reach into that jar to compensate for poor results or add to it to dampen good ones. This ploy, according to Ofheo (Office of Federal Housing Enterprise Oversight), gave Fannie “inordinate flexibility” in reporting the amount of income or expenses over reporting periods.
This flexibility also gave Fannie the ability to manipulate earnings to hit — within pennies — target numbers for executive bonuses. Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million.
Well, in its wisdom, Fannie decided to recognize only $200 million [of losses], deferring the other half. That allowed Fannie’s executives — whose bonus plan is linked to earnings-per-share — to meet the target for maximum bonus payouts. The target EPS for maximum payout was $3.23 and Fannie reported exactly . . . $3.2309. This bull’s-eye was worth $1.932 million to then-CEO James Johnson, $1.19 million to then-CEO-designate Franklin Raines, and $779,625 to then-Vice Chairman Jamie Gorelick.
As for other losses, they were routinely mischaracterized so that they could be amortized over years, not realized fully as they were supposed to be. By this method, the Fannie Mae management siphoned off millions of dollars in excess compensation to top management, including Gorelick.
It is certainly possible that the culture at Fannie Mae was so thoroughly corrupt that Jamie Gorelick did not know that cooking the books in this fashion was illegal, but it strains credulity to suppose that she did not know that the books were being cooked. I doubt that Gorelick was so stupid or incompetent not to notice that Fannie Mae profits were regularly reported in such a way as to maximize her bonuses.
And you would think that, as Vice Chairman and a lawyer, she would be one of the people who most clearly should have known that the fairly obvious cooking of the books was indeed improper.
It seems that both Gorelick and Raines did rather well during their stay at Fannie Mae. Reportedly Raines walked away with $100,000,000 and Gorelick with $75,000,000.
