By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, December 10, 2008
Former Fannie Mae chief executive Franklin D. Raines, encountering accusations from a congressional panel yesterday that he and his colleagues acted irresponsibly in making decisions that led to the housing crisis, blamed the federal regulator that oversaw his company for failing to rein in risky practices.
Raines joined his successor, Daniel H. Mudd, and former Freddie Mac chief executives Richard F. Syron and Leland C. Brendsel for a grilling yesterday by lawmakers on the House Oversight and Government Reform Committee who questioned why the companies moved aggressively into buying and guaranteeing risky mortgages despite warnings from risk officers about the dangers they posed to the companies and borrowers.
"Their irresponsible decisions are now costing taxpayers billions of dollars," said committee Chairman Henry A. Waxman (D-Calif.).
Raines said the decision to move into new markets largely came after his tenure and should have been constrained by the company's regulator.
"It is remarkable that during the period that Fannie Mae substantially increased its exposure to credit risk," Raines said. "Its regulator made no visible effort to enforce any limits."
The agency that regulated Fannie as it acquired and backed risky loans, the Office of Federal Housing Enterprise Oversight, is now part of the agency that runs Fannie and its sibling, Freddie Mac. Both companies were taken over by the government three months ago after suffering billions of dollars of losses.
James B. Lockhart III, former director of OFHEO and now director of the new agency, the Federal Housing Finance Agency, disputed Raines's characterization. "Mr. Raines is misinformed," Lockhart said through a spokeswoman. Among other steps, the regulator told the companies in recent years to limit their purchases of loans and issued guidance with the goal of avoiding risk at the firms.
Lawmakers investigating what led to the collapse of Fannie and Freddie accused the richly-compensated executives of greed, recklessness and helping to cause the financial crisis.
The committee released e-mails, memos, presentations and other documents showing that top executives at Fannie and Freddie were warned years ago that moving into new, risky areas of the mortgage market posed significant dangers to the companies and borrowers.
"These documents make clear that Fannie Mae and Freddie Mac knew what they were doing," Waxman said. "Their own risk managers raised warning after warning about the dangers of investing heavily in the subprime and alternative mortgage markets."
The government has put up $200 billion to back Fannie and Freddie if they falter further; it has already injected $14 billion into Freddie.
The former chief executives responded that they worked on behalf of disparate interests, were blindsided by an unforeseeable housing crises and carefully weighed decisions before acting on them. Raines was the only one to single out the regulator for blame.
Raines has been at odds with Fannie regulators since 2004 when the agency accused him and other executives of manipulating profits in a way that boosted bonuses. The allegations led to a $6.3 billion accounting restatement, but Raines denied wrongdoing. Raines has been sparring in court with the regulator in the years since.
Yesterday, when the lawmakers pushed the executives on why they entered risky new markets, the chief executives responded that lenders wanted the companies to buy the loans, which were fast becoming a big share of the mortgage market.
"We couldn't afford to make the bet that the changes were not going to be permanent," Mudd said.
Despite the losses their companies have suffered, the executives said the companies did not play a major role in bringing about the wider financial crisis.
"All four of you seem to be in complete denial that Fannie and Freddie are in any way responsible for this," said Rep. Darrell Issa (R-Calif.). "You're either standing behind the mandate of Congress or your mandate of your stockholders or perhaps the mandate of your bonus packages and you're telling us everyone's doing it."
Rep. Carolyn B. Maloney (D-N.Y.) pressed Syron about his decision to buy loans that didn't require borrowers to state their income or assets.
"In perfect hindsight, I think we always wish that we hadn't bought them," he responded. "But given the information that we had at the time and given the balance we were trying to achieve, we thought we were making the right decision."
Maloney asked why Syron fired David Andrukonis, the Freddie Mac chief risk officer who authored many memos warning about the dangers of moving into riskier parts of the mortgage market.
"Do you regret firing him?" Maloney asked. "Do you regret buying these risky loans? Do you regret the way you led -- and I would say mismanaged -- this company?"
Syron said Andrukonis "was fired for a variety of reasons. It was not primarily for his having a view on credit."
Mudd told the panel that Fannie's shape was not so bad that it required the government to take it over.
"While I deeply respect the myriad challenges facing the Treasury Department and the regulator, I did not believe that conservatorship was the best solution for Fannie Mae," Mudd said. He said he favored "more modest" steps, such as what the government has done with banks.