Report: Freddie Mac Chief Disregarded Warnings

08-05-2008
Reuters

U.S. mortgage market giant Freddie Mac's chief executive dismissed internal warnings that could have protected the company from some of the financial problems now engulfing it, the New York Times said, citing more than two dozen current and former high-ranking executives and others.

In 2004, Chief Executive Richard Syron received a memo from Freddie Mac's chief risk officer warning him that the firm was financing questionable loans that threatened its financial health, the paper said.

Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Syron heightened those perils by ignoring repeated recommendations, the NY Times said.

In an interview with the paper, Freddie Mac's former chief risk officer, David Andrukonis, recalled telling Syron in mid-2004 that the company was buying bad loans that would likely pose an enormous financial and reputational risk to the company and the country.

Syron received a memo stating that the firm's underwriting standards were becoming shoddier and that the company was becoming exposed to losses, the paper said, citing Andrukonis and two others familiar with the document.

But Syron refused to consider possibilities for reducing Freddie Mac's risks, the paper cited Andrukonis as saying.

"He said we couldn't afford to say no to anyone," the paper quoted Andrukonis as saying. Over the next three years, Freddie Mac continued buying riskier loans, the paper said.

You gotta love how this story continues to build up. The thing that amazes me is that few people are catching on to the correlation between low interest rates and the huge malinvestment that has occurred over the past several years. Look at the chart on this page and compare it to the dates mentioned in the above article:

http://www.moneycafe.com/library/fedfunds.htm

The subprime mortgage market starting heating up pretty much as soon as Alan Greenspan and the Fed lowered interest rates to 1% in an effort to stall a recession. When you factor in inflation (even the CPI as reported by the government), that is essentially giving away free money. If you go out onto the street and start handing out money and the only catch is that people have to pay you 1% annually in interest, there will be a lot of takers. The thing you then have to ask is where do you think that money would go? Probably on a "special item" or to something they wouldn't otherwise have bought. This is really what the situation was just several years ago with the Fed and the major banks. Banks could all of a sudden borrow money at insanely cheap rates and go into a market they otherwise wouldn't have entered (subprime). I am convinced that cheap money from the Fed is what got us into today's trouble. Easy money does not promote hard work and smart investment. Easy money creates bubbles and the "business cycle", all of which are conveniently blamed on capitalism as the call for more power to the Federal Reserve and the government over the economy persist.

What's hilarious is that easy money is seen as the solution to solve the malinvestment caused by easy money (that's a little tricky). There were plenty of people within Fannie and Freddie who saw or roughly saw where they were headed. Freddie CEO Richard Byron got plenty of pay increases over the past few years and sure must feel comfortable now that his company has an unlimited line of credit with the Treasury. It is ridiculous to believe that we must bail out these businesses who well knew what they were getting into. Not only should Freddie and Fannie fail, they deserve to fail. Unfortunately even if they were to fail, people would still likely ignore the role the Federal Reserve has and continues to play in manipulating the economy. What's also funny is that now Alan Greenspan is going around talking up how banks around the world will fail and be bailed out by governments (he's probably right) when he deserves to be blamed as much as Bernanke or anyone else involved in this. I don't know what changed Greenspan, as he used to actually be a big supporter of a gold standard:

Gold and Economic Freedom - Alan Greenspan (1967)

Anyway, just some thoughts and rambling on the same ol' topic of monetary policy and the Federal Reserve.