Franklin Raines

Franklin Raines
Fannie Mae

JANUARY 10, 2005

On Labor Day, he was a favorite to be Treasury Secretary should John Kerry win the White House. At yearend, he had left under a cloud. The charmed career of Franklin D. Raines -- a poor kid from Seattle who climbed through Harvard and a Rhodes Scholarship to become White House budget director and CEO of Fannie Mae (FNM ) -- crashed to a halt on Dec. 21. That was six days after the Securities & Exchange Commission's top accountant declared that mortgage giant Fannie misstated earnings for 3 1/2 years, leading to an estimated $9 billion restatement that will wipe out 40% of profits from 2001 to mid-2004.


Supporters of Raines, 55, insisted that he wasn't culpable for Fannie's misuse of obscure accounting standards. But that argument didn't wash. Raines was in charge in 2001, when Fannie chose to create what the SEC dryly called "its own unique methodology" to calculate the earnings impact of its trillion-dollar portfolio of derivatives. Raines gave Chief Financial Officer J. Timothy Howard free rein and tolerated "weak or nonexistent" financial controls, according to a scathing report issued in September by the Office of Federal Housing Enterprise Oversight, Fannie's regulator.

Worse, the CEO failed to manage the scandal. When sibling Freddie Mac's accounting first came under fire in mid-2003, Raines's arrogant insistence that Fannie was above reproach spurred OFHEO to do a white-glove examination. And when that uncovered the improper bookkeeping, Raines insisted on an SEC review, which he maintained would vindicate Fannie. "Frank was supposed to be the great political risk manager," says independent banking analyst Bert Ely in Alexandria, Va. "Instead, he compounded the problems."

When Fannie's board balked over ousting Raines, OFHEO forced its hand. Raines described his exit as an "early retirement' that was self-initiated and says that it shows he was accountable for the SEC findings. Fittingly, Raines -- a man who built a $54 billion behemoth with his mastery of behind-the-scenes politicking -- went down spinning.
http://www.businessweek.com/magazine/content/05_02/b3915646.htm

Wednesday, May 24, 2006

Fannie Mae engaged in "extensive financial fraud" over six years by doctoring earnings so executives could collect hundreds of millions of dollars in bonuses, federal officials said yesterday in a report that portrayed a company determined to play by its own rules.

Regulators at the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight, in announcing a settlement with Fannie Mae that includes $400 million in penalties, provided the most detailed picture yet of what went wrong at the congressionally chartered firm.

They portray the District-based mortgage funding giant -- a linchpin of the nation's housing market -- as governed by a weak board of directors, which failed to install basic internal controls and instead let itself be dominated and left uninformed by chief executive Franklin Raines and Chief Financial Officer J. Timothy Howard, who both were later ousted.

http://www.washingtonpost.com/wp-dyn/content/article/2006/05/23/AR2006052300184.htm

August 10, 2008 11:10 EDT
U.S. Treasury Secretary Henry Paulson said there are no plans to use his new authority to inject capital into mortgage companies Fannie Mae and Freddie Mac, which both posted worse-than-expected earnings last week.
``Given that Fannie Mae and Freddie Mac are solely involved in housing, that's their sole business, and given the magnitude of the housing correction we've had, it's not a surprise to me to see those losses,'' Paulson said.

Shares Plunge

Shares in Fannie and Freddie have plummeted more than 80 percent this year on concern they don't have sufficient capital to withstand record foreclosures on the $5.2 trillion of mortgages they own or guarantee.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aULVZ2mAF9es&refer=home







He served in the Carter Administration as associate director for economics and government in the Office of Management and Budget and assistant director of the White House Domestic Policy Staff from 1977 to 1979. Then he joined Lazard Freres and Co., where he worked for 11 years and became a general partner. In 1991 he became Fannie's Mae's Vice Chairman, a post he left in 1996 in order to join the Clinton Administration as the Director of the U.S. Office of Management and Budget, where he served until 1998. In 1999, he returned to Fannie Mae as CEO, "the first black man to head a Fortune 500 company."^[3]
During a 2008 House Committee on Oversight and Government Reform hearing on the role of Fannie Mae and Freddie Mac in the financial crisis, including in relation to the Community Reinvestment Act, asked if the CRA provided the "fuel" for increasing subprime loans, former Fannie Mae CEO Franklin Raines said it might have been a catalyst encouraging bad behavior, but it was difficult to know. Raines also cited information that only a small percentage of risky loans originated as a result of the CRA.

President Ronald Reagan

In regards to the current financial crisis described by many as the worst in multiple generations, billionaire investor George Soros stated here:

The cause of the current troubles dates back to 1980, when U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher came to pwoer. It was during this time that borrowing ballooned and regulation of banks and financial markets became less stringent. These leaders believed that markets are self-correcting, meaning that it prices get out of whack, they will eventually revert to historical norms. Instead, this laissez-faire attitude created the current housing bubble, which in turn led to the seizing up of crdeit markets...

Soros further opines elsewhere:

...regulations have been progressively relaxed until they have practically disappeared.

December, 1982--Garn - St Germain Depository Institutions Act of 1982 enacted. This Reagan Administration initiative is designed to complete the process of giving expanded powers to federally chartered S&Ls and enables them to diversify their activities with the view of increasing profits. Major provisions include: elimination of deposit interest rate ceilings; elimination of the previous statutory limit on loan to value ratio; and expansion of the asset powers of federal S&Ls by permitting up to 40% of assets in commercial mortgages, up to 30% of assets in consumer loans, up to 10% of assets in commercial loans, and up to 10% of assets in commercial leases.

• Deregulation practically eliminated the distinction between commercial and savings banks.
• Deregulation caused a rapid growth of savings banks and S&L's that now made all types of non homeowner related loans. Now that S%L's could tap into the huge profit centers of commercial real estate investments and credit card issuing many entrepreneurs looked to the loosely regulated S&L's as a profit making center.
• As the eighties wore on the economy appeared to grow. Interest rates continued to go up as well as real estate speculation. The real estate market was in what is known as a "boom" mode. Many S&L's took advantage of the lack of supervision and regulations to make highly speculative investments, in many cases loaning more money then they really should.
• When the real estate market crashed, and it did so in dramatic fashion, the S&L's were crushed. They now owned properties that they had paid enormous amounts of money for but weren't worth a fraction of what they paid. Many went bankrupt, losing their depositors money. This was known as the S&L Crisis.
• In 1980 the US had 4,600 thrifts, by 1988 mergers and bankruptcies left 3000. By the mid 1990's less than 2000 survived.

In less then 7 years after the initiation of this major banking deregulation, in February of 1989, President Bush (the first of course) unveiled the S&L bailout plan. As the Help Center puts it;

The S&L crisis cost about 600 Billion dollars in "bailouts." This is 1500 dollars from every man woman and child in the US.

http://seekingalpha.com/article/71265-the-credit-bubble-deregulation-gone-wild




Deja Vu

Some Music

-06-04-2010(Part1)

Allen Greenspan

"When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage.

" The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

###

Alan Greenspan
[written in 1966] (1)

Remarks by Chairman Alan Greenspan
At the Annual Dinner and Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research, Washington, D.C.
December 5, 1996

"The Federal Reserve's most important mission, of course, is monetary policy.

"Augmenting concerns about the Federal Reserve is the perception that we are a secretive organization, operating behind closed doors, not always in the interests of the nation as a whole. This is regrettable, and we continuously strive to alter this misperception.
There are certain Federal Reserve deliberations that have to remain confidential for a period of time. To open up our debates on monetary policy fully to immediate disclosure would unsettle financial markets and constrain our discussions in a manner that would undercut our ability to function.

"Inflation can destabilize an economy even if faulty price indexes fail to reveal it.

"But where do we draw the line on what prices matter? Certainly prices of goods and services now being produced--our basic measure of inflation--matter. But what about futures prices or more importantly prices of claims on future goods and services, like equities, real estate, or other earning assets? Are stability of these prices essential to the stability of the economy?
But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?

"Our overall management of the Federal Reserve System should, and does, come under considerable scrutiny by the Congress. Since we expend unappropriated taxpayer funds, we have an especial obligation to be prudent and efficient with the use of those funds.

"Finally, the substantial changes under way in bank risk management are pressing us to continuously alter our modes of supervision and regulation to keep them as effective and efficient as possible.

"Along with our other central bank colleagues, we are always looking for ways to reduce the risks that the failure of a single institution will ricochet around the world, shutting down much of the world payments system, and significantly undermining the world's economies. Accordingly, we are endeavoring to get as close to a real time transaction, clearing, and settlement system as possible.

"Central banks need to respond patiently and responsibly to the commentary, and we need to adapt to changing circumstances in markets and the economy.

"A democratic society requires a stable and effectively functioning economy.

"It is, thus, no wonder that we at the Federal Reserve, the nation's central bank, and ultimate guardian of the purchasing power of our money, are subject to unending scrutiny. Indeed, it would be folly were it otherwise."(2)

June 17, 2004The US Senate confirms Greenspan for his fifth term as Fed chairman. His new term begins on June 19.(3)


Later in 1987 though, the deregulation proponents get a powerful new voice. In August 1987, Ronald Reagan appoints Ayn Rand disciple and strong believer in Laissez-faire markets, Alan Greenspan to become chairman of the Federal Reserve Board, thereby setting in place a series of events that would ultimately lead to the financial industry tearing down its Glass-Steagall wall. Unlike the wonders of the elimination of the Berlin Wall though, the results here were far less positive. Lets follow a few of the tidbits as told once again by Frontline:

In January 1989, the Fed Board approves an application by J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the Glass-Steagall loophole.

In 1990, J.P. Morgan becomes the first bank to receive permission from the Federal Reserve to underwrite securities.

In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting.
In August 1997, the Fed eliminates many restrictions imposed on "Section 20 subsidiaries" by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be "manageable," and says banks would have the right to acquire securities firms outright.

In 1997, Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex. Brown & Co., becoming the first U.S. bank to acquire a securities firm.

In 1998, the stakes are raised, as the financial industry goes for the juggular. Again from Frontline:

On April 6, 1998, Weill and Reed announce a $70 billion stock swap merging Travelers (which owned the investment house Salomon Smith Barney) and Citicorp (the parent of Citibank), to create Citigroup Inc., the world's largest financial services company, in what was the biggest corporate merger in history. The transaction would have to work around regulations in the Glass-Steagall and Bank Holding Company acts governing the industry, which were implemented precisely to prevent this type of company: a combination of insurance underwriting, securities underwriting, and commecial banking. The merger effectively gives regulators and lawmakers three options: end these restrictions, scuttle the deal, or force the merged company to cut back on its consumer offerings by divesting any business that fails to comply with the law....Following the merger announcement on April 6, 1998, Weill immediately plunges into a public-relations and lobbying campaign for the repeal of Glass-Steagall and passage of new financial services legislation.

Ultimately, the efforts succeeded:

After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long-overdue demise of a Depression-era relic.

Fresh off of this "victory", incredulously, the man who was charged with being the banking systems chief regulator, Fed Chairman Alan Greenspan continued to lead the charge towards a completely unregulated financial system as he turned his sites towards championing the growth of unregulated derivatives. From a February 2000 New York Times article:

The Federal Reserve chairman, Alan Greenspan, urged Congress today to encourage the growth of complex financial contracts known as derivatives...United States laws impede its development, Mr. Greenspan said in testimony...

The ensuing years saw the accelerating phenomenon where, with the last major regulatory impediment removed, and more importantly perhaps, not replaced with any form of updated regulation, the credit bubble accelerated, fueled heavily by the explosive growth in unregulated derivatives. In early 2007, Financial Sense described the parabolic growth occurring in unregulated derivatives since 1999:

For the latest data ended 1H 06, the prior six month growth in worldwide OTC notional derivatives outstanding was a little in excess of $72 trillion, standing at $370 trillion as of 6/30/06, up from $298 trillion at 2005 year end. For a bit of perspective, total planet Earth did not have $72 trillion in total derivatives outstanding eight years ago, and now we're growing by that total amount in six months.

The result of this is that today we have what is called the $516 trillion shadow banking system, the "secret banking system built on derivatives and untouched by regulation" according to the worlds largest bond fund manager, Bill Gross.

"My Pimco colleague Paul McCulley has labeled it the "shadow banking system" because it has lain hidden for years, untouched by regulation, yet free to magically and mystically create and then package subprime loans into a host of three-letter conduits that only Wall Street wizards could explain. It is certainly true that this shadow system, with its derivatives circling the globe, has democratized credit." (4)


(1) http://www.321gold.com/fed/greenspan/1966.html

(3)http://www.noblesoul.com/orc/bio/greenspan-time.html
(2)http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm
(4)http://money.cnn.com/2007/11/27/news/newsmakers/gross_banking.fortune/

The Great American Bank Robbery, Hammer Museum