'Intelligent discontent is the mainspring of civilization.' -- Eugene V. Debs

Monday, January 26, 2009

So Much for Responsibility 

President Barack Obama, in his inaugural address:

What is required of us now is a new era of responsibility — a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.

From Fannie Mae, formally known as the Federal National Mortgage Association, in a Securities and Exchange Commission filing today:

Based on preliminary unaudited information concerning its results for these periods, management currently expects that the Federal Housing Finance Agency, acting in its capacity as conservator of Fannie Mae (the "Conservator"), will submit a request to the U.S. Department of the Treasury ("Treasury") to draw funds on behalf of Fannie Mae under the $100 billion Senior Preferred Stock Purchase Agreement entered into between Treasury and the Conservator, acting on behalf of Fannie Mae, on September 7, 2008, and subsequently amended and restated on September 26, 2008 (the "Purchase Agreement"). Although management currently estimates that the amount of this initial draw will be approximately $11 billion to $16 billion, the actual amount of the draw may differ materially from this estimate because Fannie Mae is still working through the process of preparing and finalizing its financial statements for the fourth quarter of 2008 and the year ended December 31, 2008.

Furthermore, as noted by CalculatedRisk: This follows the SEC filing from Freddie Mac outlining the request of up to $35 billion from the Treasury. For the uninitiated, Fannie and Freddie are government sponsored entities that have historically stabilized the housing market by agreeing to purchase mortgages and securitize them in the form of bonds. Note that they are government sponsored, not government owned, meaning that they are private entities in which private investors have made substantial profits over the years.

Both Fannie and Freddie continue to have unfettered access to the Federal treasury despite dubious histories that I described last September:

Meanwhile, there is the impolite question of fraud at the two institutions. Federal regulators decided to take action to seize them after encountering serious accounting irregularities. According to Gretchen Morgenson and Charles Duhigg of the New York Times, the government decided that the seizure of Fannie and Freddie was unavoidable because Freddie, and to a lesser extent, Fannie, had overstated their capital base, creating a more serious risk of default than either had acknowledged. Furthermore, Fannie and Freddie already had a history of manipulating earnings through questionable accounting practices, such as here and here and here and here. To date, I haven't heard any reports of a criminal investigation.

Another 46 to 51 billion dollars for Fannie and Freddie, and still no word about any investigation. I recall shuddering when I heard that Obama had emphasized responsibility in his inaugural address. In my experience, the degree of responsibility required by American politicians goes up as income goes down.

Or, perhaps more accurately in this context, as income goes up, responsibility evaporates. In the rarified world of Fannie and Freddie executives, nothing is demanded of them in return for billions in Federal assistance. Meanwhile, for the rest of us, there is the prospect of entitlement reform, more crudely known as cuts in Social Security and Medicare.

Hat tip to CalculatedRisk.

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