FRONT PAGE CONTRIBUTOR
Quis Custodiet Ipsos Custodes? The SEC Perhaps?
I hear always the admonishment of my friends:
“Bolt her in, constrain her!” But who will guard
the guardians? The wife plans ahead and begins with them!.
– Juvenal, Satire VI, (HT:Wikipedia)
The Washington Post reports this morning. The Securities and Exchange Commission is mounting an effort to charge four current and former senior executives from Fannie Mae and Freddie Mac for failing to properly disclose information about their mortgage portfolios to investors during the recent housing collapse. The Post describes this uncommon, yet welcome impetus towards law enforcement activity athwart corrupt financiers below.
The executives include former Fannie chief executive Daniel Mudd, former Freddie chief executive Richard Syron, former Freddie chief financial officer Anthony “Buddy” Piszel and current Freddie executive Donald Bisenius,…One of the chief allegations against Fannie executives is that it characterized mortgage loans as “prime” — meaning high-quality — when they should have been classified in a more risky category of loans. Meanwhile, Freddie executives are accused of not fully warning investors about the risks associated with subprime loans.
This is an obvious necessity, because Fannie Mae and Freddie Mac have kept a set of books that would have embarrassed the Green-Eyeshade Set over at Enron. According to Marketwatch.com, they developed a curious (meaning not quite as bad as Idi Amin munching your cousin, but of dubious ethical provenance) definition of “accumulated other comprehensive income (AOCI.) Marketwatch describes the Machiavellian Mumbo-Jumbo below.
To avoid recording a loss, says Barron’s, Fannie Mae used a series of legal mechanisms to transfer negative numbers to its balance sheet under “accumulated other comprehensive income,” or AOCI. The AOCI strategy lets Fannie Mae “burn off” losses over time. Without that, says Barron’s, Fannie’s 2002 earnings of $6.4 billion would have been overwhelmed by $8.9 billion in cash-flow hedging losses. Barron’s says $3 billion in losses that were recognized in 2002-2003 “pale against” $19 billion paid to settle underwater interest-rate swaps in those years.
When cheerleaders for the state are forced to admit that somehow the operations in the Fannie Mae Regulatory Compliance Offices belie the very meaning of regulatory compliance, we are then treated to the tedious falsehood that Fannie Mae operated primarily as a private sector entity. This attempts to obfuscate the fact that by the late 1990’s and early 2000’s Fannie Mae and Freddie Mac were repeatedly used as lifestyle ATM’s by 3rd-rate bureaucratic hacks that make the job title Civil Servant seem like nothing better than Orwellian Oxymoron.
The parade of moral philosophers, through the hallowed gates of Fannie and Freddie, is both vast and iniquitous. Rahm Emanuel attended six meetings as a board member at Freddie Mac and pocketed a cool $320,000. The Talented and Loverly Jamie Gorelick, author of the infamous “Wall of Seperation” Memo, graced the Corporate Headquarters of Fannie Mae from 1997-2003 as a Vice Chairman.
I lack the civility to accurately describe how Former Clinton-era budget director; Franklin Raines, ran things at Fannie Mae. Visigoth Holiday is about the most work-safe term for his stewardship that I can come up with. Fool.com remains more cool and analytic.
Under Raines’ leadership, Fannie overstated earnings by a stunning $10.6 billion, all the while paying Raines and his senior management team massive bonuses….All told, Raines pulled in some $90 million between 1998 and 2003, the majority from bonuses. And when OFHEO began to ask uncomfortable questions, Raines actively lobbied Congress to cut its funding. In April, Raines agreed to disburse $24 million for his role in the accounting “errors.”
So FINALLY! AT LAST! The SEC has decided to move. As President Lincoln was said to have spoken once in exasperation, during the American Civil War, “If you don’t intend to use your army, may I please borrow it?!”
But here’s the punch line, and this one will just kill you – like Mayor Emanuel probably would if he had an ice-pick handy. Fannie and Freddie are now owned by the US Treasury. As part of the SEC legal actions, the SEC wants to hand out about $100M in fines. So if the US Treasury owns these two vast, numb suckage-vortices of villainy and corruption, and the SEC lays its vengeance upon them, guess who gets to pay the fines?
Do they confiscate Blarney Auld Christopher Dodd’s Wee Irish Cottage? Do they repossess Raines’ Big, Bad Lexus Infiniti? So how’s about checking Mayor Emanuel and Jamie Gorelick into one of those ethical rehab facilities known as a Federal penitentiary? Nope. And why is it always the same people laughing when I suggest these crazy things?
No, Ladies and Germs, if truth and justice is served, if the fulsome and scurvy malefactors are found guilty, the Treasury will disburse the $100M fine from one account to another. Oh, and by the way, that $100M will then tacked onto our colossal National Debt. They have to; in the name of good, honest accounting, of course! It would totally suck if nobody were to properly guard the guardians.