SKARBECK: Why do Fannie, Freddie deserve a free pass?

May 29, 2010

Ken Skarbeck InvestingLately it seems that as soon as a serious issue surfaces, it is booted off the front page by the next crisis.

One major financial issue after another gets supplanted by the next calamity, including the Madoff and Stanford Ponzi schemes, the Lehman Brothers Repo 105 accounting scam, the Goldman Sachs fraud charge by the SEC, the BP oil spill, the government’s financial reform legislation, the Greece debt crisis, the May 6 stock market “Flash Crash,” and the spreading European economic crisis. Heavens, what’s next?

It has also become routine for Congress to berate a revolving door of individuals for their role in these crises. The offenders publicly grilled about their misdeeds—the whole ordeal comes across as slightly more civil than peppering the offenders with rotten tomatoes.

However, one crisis that continues to simmer under the public radar is the endless taxpayer support needed to prop up Fannie Mae and Freddie Mac. The lack of public attention to this financial quagmire could be because Congress has no one to blame but itself.

The taxpayer’s tally so far is staggering. Fannie Mae recently requested $8.4 billion from the Treasury to remain solvent, bringing total infusions to $84.6 billion, while Freddie Mac is seeking another $10.6 billion, in addition to the $50.7 billion it has received since November 2008. Between the two companies, taxpayers have contributed $146 billion to date, and the government has promised unlimited capital through 2012. In January, the Congressional Budget Office estimated that direct U.S. aid to the two government-sponsored enterprises may total $389 billion by 2019.

The CBO also estimated that if the operating costs of the two companies were included in the overall federal budget, the 2009 budget deficit would be greater by $291 billion. And, if their total debt and mortgage guarantees ($8.1 trillion) were added to U.S. government debt outstanding ($7.8 trillion), the liabilities on the balance sheet of the United States would more than double.

The failure is a story of mismanagement, deceptive accounting and failed regulation, with observers suggesting the firms went awry by trying to serve two masters. Fannie and Freddie were charged with a mission of promoting homeownership among lower-income borrowers, which fell in conflict with the shareholder demands they faced as publicly traded companies.

Both firms had a powerful lobby that battled attempts to restrain their expansion. Executive greed was on full display—Franklin Raines, Fannie Mae CEO from 1998 to 2003, collected $91 million in compensation. In 2006, the top five executives at Freddie and Fannie were paid a combined $69 million—right in the thick of the subprime mortgage smorgasbord that would trigger the credit crisis.

In 1992, Congress had established the Office of Federal Housing Enterprise Oversight, or OHFEO, whose sole charge was to regulate Fannie and Freddie. Warren Buffett has commented that OHFEO, with over 200 employees and a $65 million budget, was clearly incompetent in its regulatory tasks, yet concedes that when the management of complex financial institutions wants to deceive you, it can be very, very difficult to decipher their accounting tricks.

Our government, already overstrained, must get their arms around the problems at Fannie Mae and Freddie Mac. The health of the housing market depends on it.•


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.


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