Bank of America to Fannie Mae: If That's the Way You Want to Do Business, We Won't Do Business with You!

Over a the two decades before the Housing bubble burst, Countrywide Financial became Fannie Mae's biggest supplier of mortgages to securitize. Gretchen Mortgenson and Joshua Rosner document the symbiotic relationship between Angelo Mozilla's Countrywide and Fannie in Reckless Endangerment.  Their relationship was both financial and political as they built up the financial industrial complex that drove the financial system to ruin.  Although Mortgenson and Joshua Rosner demonstrate how these two firms worked with the politicians' and the government's aiding and abetting to degrade credit quality, Fannie is now owned by the federal government.  Under this new management, Fannie wants to only buy mortgages from Bank of America (Countrywide was rescued by Bank of America) on the condition that it can sell it back to the bank if they do not conform to its underwriting standards ex post facto. 

You May Make the Rules, But I Do Not Have to Play the Game

Bank of America has said "No deal!"  It thought it was helping out when it rescued Countrywide only to be hit with one law suit after another from the government.  Bank of America has learned how the government treats those who give the country a helping hand: it bites it until it bleeds.  Exposing oneself to unknown and unlimited liability is not the path to success in banking.

WSJ's David Benoit reports:

Sheila Bair, Financial Reform, and Fannie and Freddie: Of Sound and Fury

President Obama has signed into law the Dodd Frank financial reform law. 

The most needed provision of the new law is its authority to resolve failing non-banks procedures along the lines of the FDIC's bank failure resolution process when the non-bank poses systemic risk The FT's Tom Braithwaite interviews Sheila Bair, Chairman of the FDIC, in this video (10m 19sec) "about how she is going to implement the new powers that were given to her by the new legislation on financial reform."

In an unrelated(?) story, Congressman Issa has dug up some very interesting facts about two non-banks not covered by Dodd-Frank.  The Financial Times' Suzanne Kapner reports "Countrywide Financial made 153 “VIP” loans to Fannie Mae executives, in an effort to win goodwill from the giant mortgage finance company, according to a letter released on Tuesday by a US congressman.


"An additional 20 VIP loans were made to Freddie Mac employees, the other large government-sponsored buyer of home loans, according to the details released by Darrell Issa, a California Republican."

Senator Dodd was a recipient of two of Angelo's VIP loans.

Which brings us to the most interesting question about the financial reform package.  The President assures us this will end future bailouts.  Unfortunately, the President left the job of constructing a bill to Congress.  Congress gave us a 2,300 page rewrite of financial regulation and it contains is no solution to the Freddie Mac and Fannie Mae problem.  Here is the biggest sinkhole in the federal bailout and not a word!  I guess Congress did not want to mess with the Financial Industrial Complex.  Incidentally (?), Senator Dodd and President Obama were the two biggest recipients of campaign contributions from Fannie and Freddie sources.   Dr. Blair prudently sidestepped a question on this amazing omission.  Neil Murphy, an eminent banking authority, loved to ask "Other than that, Mrs. Lincoln, how was the play?"  I can hear him ask it again.

But do not worry!   Suzanne Kapner  writes, "Barney Frank, a Massachusetts Democrat, has said that he plans to start work on new legislation when Congress returns from its August recess. The White House is expected to submit plans for fixing the system by early next year."

"To-morrow, and to-morrow, and to-morrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death."

There You Go Again, Mr President!

The editors of Wall Street Journal wonder if Ginnie Mae is "The Next Fannie Mae?" Specifically they worry, "Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages." They explain, "Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration [the FHA], which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee."

In August, 2008, I deplored the Financial Industrial Complex, the lobbyists and investment bankers that have Congress wrapped around their fingers, in "Fannie Mae and Freddie Mac: Look Past the Jargon, and You Find a $5 Billion Scandal." The federal government's takeover of Fannie and Freddie effectively transferred private sector and foreign government losses to the American taxpayer. Now the Administration is continuing that practice on what promises to be a grand scale using Ginnie Mae. The lobbyists, their congressional clients, and the administration are happily portraying this fiscal folly as "feeling the homeowners' pain" and "dealing with the foreclosure problem."

No doubt the administration's complicity in the renewed supply of dodgy debt will keep the Chinese happy (they have a huge exposure to American mortgage backed securities) and it indirectly bails out the Fed (have you looked at the Federal Reserve Bank of New York's balance sheet lately?) The Financial Industrial Complex, which you think would be hiding in disgrace, is riding high. I past a car yesterday, and it was not a Mercedes or an SUV, which had written on its window in soup: "Honk, if I am paying your mortgage."


Mark Twain once boasted, "We have the best Congress money can buy."

The GSEs Knew They Were Taking On Higher Risks

The Wall Street Journal's James R. Hagerty tells us that the brass at Fannie Mae and Freddie Mac knew they were taking on risks. He writes, "The emails show that the two government-backed mortgage companies were aware they were taking on more risk as the housing bubble peaked. But the companies pressed ahead with efforts to regain market share they had lost to Wall Street investment banks. They did so by buying loans and securities that increased their exposure to subprime mortgages, for people with weak credit records, and Alt-A mortgages, which typically spare borrowers from having to document their income and assets."

Fannie went through three chief risk officers between 2004 and 2008. As the financial crisis approached they cut their spending on risk control.

Did Freddie fire David Andrukonis for opposing their getting into NINA (no income, no assets) mortgages?

It was not just about market share. They were trying to please their congressional allies, or should I call them their unindicted conspirators.

Speech by Federal Reserve Chairman Ben S. Bernanke : "The Future of Mortgage Finance in the United States"

Chris Dodd and Angelo

Senator Christopher Dodd chairs the Financial Services Committee. Chris Dodd is a Democrat from Connecticut. I used to live in the Second District which he once represented, as did his father, Tom Dodd, before him.

Christopher Keating reports on the Capitol Watch blog for The Hartford Courant that Dodd, the younger, refinanced two 30-year mortgage loans from Countrywide Financial Corp. in 2003.

Countrywide was America's biggest mortgage lender. Countrywide's business model was to write mortgages through its network of offices around the country and package them into mortgage backed bonds. It got itself into financial trouble when it found it could no longer tap short term credit markets to provide bridge financing while it marketed these bonds. That was further aggrevated when investors became reluctant to buy them.

Fannie Mae's and Freddie Mac's exposure to Countrywide was substantial. Bernard Ducalion tells us, "During the first nine months of 2007, Countrywide accounted for about 29% of Fannie’s single-family business volume (Page 106 of 10-Q)."

Countrywide's chairman and chief executive officer, Angelo Mozilo, personally handled Dodd's refinancing. This was under a special procedure for high profile loans called the "Friends of Angelo" program. "Dodd refinanced his Washington townhouse with a loan of $506,000 and refinanced his East Haddam home for $275,042." Conde Nast Portfolio estimates that the favorable rates accorded the then ranking member of the Finacial Services Committee were valuable: "The Conde Nast article stated that Dodd's 30-year loans were both designed to be at 4.875 percent, but the East Haddam loan was reduced to 4.5 percent and the Washington loan was dropped to 4.25 percent. Over the life of the loans, that saved the Dodds about $58,000 on their Washington home and $17,000 on the East Haddam home, according to the article. Countrywide also waived three-eighths of a point on one loan and one quarter of a point on the other."

Curious.

The Center for Responsive Politics has tracked the cumulative contributions since 1989 from those associated with Fannie and Freddie. Senator is #1. Interestingly, Sen. Obama, although handicaped with only four years in Congress, has leapfrogged over the other 533 members of the House and Senate to achieve #2. Sen. McCain, however, appears to be in their now nationalized GSEs' doghouse. He has gotten less than one sixth what Obama has gotten and that is over a period five times as long:

All Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008

Name	Office	State	Party	Grand Total	Total from PACs	Total from Individuals
Dodd, Christopher J	S	CT	D	$165,400	$48,500	$116,900
Obama, Barack	S	IL	D	$126,349	$6,000	$120,349
Kerry, John	S	MA	D	$111,000	$2,000	$109,000
Bennett, Robert F	S	UT	R	$107,999	$71,499	$36,500
Bachus, Spencer	H	AL	R	$103,300	$70,500	$32,800
Blunt, Roy	H	MO	R	$96,950	$78,500	$18,450
Kanjorski, Paul E	H	PA	D	$96,000	$57,500	$38,500
Bond, Christopher S 'Kit'	S	MO	R	$95,400	$64,000	$31,400
Shelby, Richard C	S	AL	R	$80,000	$23,000	$57,000
Reed, Jack	S	RI	D	$78,250	$43,500	$34,750
Reid, Harry	S	NV	D	$77,000	$60,500	$16,500
Clinton, Hillary	S	NY	D	$76,050	$8,000	$68,050
Davis, Tom	H	VA	R	$75,499	$13,999	$61,500
Boehner, John	H	OH	R	$67,750	$60,500	$7,250
Conrad, Kent	S	ND	D	$64,491	$22,000	$42,491

Welcome to our merry band of "ideologues," Mr. Secretary.

The Wall Street Journal feels vindicated by the nationalization of Freddie Mac and Fannie Mae, but worries that the reforms will not be soon through to the end. In today's editorial, they are feeling their oats. Meanwhile Senator John McCain and Governor Sarah Palin pledge to see that job through in an Op Ed piece today. Sen. McCain reminds us he warned over two years ago, "If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose."

Ken Rosen On Fannie Mae and Freddie Mac

Ken Rosen is one of the most astute observers of the housing sector. He heads a real estate hedge fund and is the Chairman of Rosen Consulting Group. He taught at the Haas School (Berkley) for many years.

Here he assesses the situation at Fannie Mae and Freddie Mac:

Fannie Mae and Freddie Mac: Look past the jargon, and you'll find a $5 trillion scandal

My recent Perspective column in the Wichita Eagle.