Think Enron Was Bad? ‘Fredron’ and ‘Fanron’ May Be Worse
Many Enron executives who inflated reported earnings and hid the company’s problems received prison sentences and had to forfeit assets. Previous Fan and Fred executives inflated earnings, paid themselves massive bonuses, and presided over historic accounting meltdowns — and got off nearly scot-free. The last batches of execs were given golden parachutes when they were removed over the weekend. Nice non-work, if you can get it.
Enron, like other U.S. companies listed on the major stock exchanges, was subject to the scrutiny, such as it was, of the Securities and Exchange Commission. Fan and Fred were specifically exempted from SEC registration and filing requirements (Fran registered voluntarily in 2004; Fred did so just a couple of months ago).
Enron led to the passage of Sarbanes-Oxley (Sarbox), which imposed onerous compliance and reporting requirements at publicly traded companies, along with potential personal liabilities on their executives. Sarbox may cause Fan and Fred’s board members to conclude that they can no longer serve without special exemption.
Is anyone surprised at how cynical so many are about their government and our governing elite?
The temptation to assign partisan blame will be irresistible. But for virtually every valid argument that Democrat-dominated Fan and Fred committed illegal or unethical acts, there will usually be a counterargument that a 12-year Republican congressional majority stood by and effectively enabled them — especially during the earlier part of this decade.
How the two GSEs acted to keep their perpetual motion machines running probably did more than anything else anyone did to bring on the explosive increase in foreclosures.
During the heyday of the home price run-up several years ago, I had a conversation with a mortgage broker I have known for many years. I questioned how aggressive mortgage lending practices were and how ridiculously easy it had become to get approved.
His response was that Fan and Fred had significantly lowered the standards built into the loan-approval programs lenders used to ensure that their mortgages would be bought by the two GSEs. Specifically:
- The credit score threshold for conventional mortgages, which had generally been 670 or more, dropped to about 630. In the real world, a score of 630 indicates that you’re having trouble with your debt load, paying your bills on time, or a little of both.
- More ominously, the credit score threshold for subprime mortgages, which had generally been 630 or more, fell to about 590. A score of 590 is the credit scoring equivalent of barely having a pulse.
A quick primer on credit scores is here.
You can see the huge impact of those moves by looking at the graphic at this myfico.com page:
- About 10%-12% of the population, people who formerly would have only qualified for subprime mortgage consideration, suddenly became eligible for conventional treatment.
- Far worse, another roughly 7%-9% of the population with awful credit records, most of whom had no business taking on a mortgage, now received subprime treatment.
No wonder loan activity boomed, followed by unprecedented defaults. In hindsight, the results we’re seeing today were an almost foregone conclusion. The way out will be a long, hard slog.
When will Washington ever learn that governments and their “clever” offshoots only make things much worse?
It’s the US government that created. enabled, and encouraged this monster.
The lack of accountability is appalling. At minimum, we need names named and those names permanently driven out of government roles.
Wrong comparison, WADR. This is not another Enron but another FSLIC/RTC/Savings and Loan bailout. Correct me if I am wrong but I think We The People are still on the hook for that famous real-estate-fueled banking implosion of a generation ago. Still waiting for someone in the financial punditocracy to make that obvious comparison.
You know what kgb-types from Russia say about it:
we got you!
i don’t believe that their involvement will ever be uncovered by our corrupted with anti-americanism FBI/CIA
but i’ve been hearing this from people in Russia and specifically those who hate USA:
“we will destroy your financial system one way or another, just wait and see”
F&F story is THE BIGGEST. There could be nothing more sensitive to USA economy then this
We are attacked. We were warned but elites – they are sold out and compromised
The only thing worse than bailing out Freddie and Fanny would be to not bail them out.
How many bad loans were knowingly issued (and commissions colected) before they were pawned off on Uncle Sucker? Maybe you lawyerly types out there can explain fraudulent convenance to everyone. If you are sitting at the table and can’t spot the sucker, it’s you, my friend.
Concerned Citizen:
the only healthy approach would be:
TO CUT LOSSES. OPENLY.
Balance the budget. At the cost of entitlements and bureaucracy.
Immediately stop ANY trade with Russia, China and OPEC
Start and finish in 3 month a switch to methanol industry along with methanol fueling stations and all car conversion to methanol:
the estimated cost is under 200 billion and doable in 3 month period
Immediately create civil defense structures: bomb shelters, bioweapons awareness, drills on national level
If all the above requires the same magnitude as the NEW DEAL as it was enacted in times of great Depression: we should do it NOW.
That is the only way to save lives of hundreds millions of Americans
- About 10%-12% of the population, people who formerly would have only qualified for subprime mortgage consideration, suddenly became eligible for conventional treatment. Far worse, another roughly 7%-9% of the population with awful credit records, most of whom had no business taking on a mortgage, now received subprime treatment.
Hmmm… gotta wonder whose favorite demo-graphic benefited most there.
Bells were going off on this well over a year ago. Why did it take until this past month to do something about it? Anyone know?
It is correct that the Republicans must have been complicit to a degree….however, the implosion is really related to the changes in creditworthiness criteria as described. These were very largely driven by Clintonistas during his administration and since then. Democrats are all over this smelly mess, like stink on ….which IS why the issue has disappeared from the front pages.
“names named” Oh and, they have a “D” behind their names.
http://article.nationalreview.com/?q=NDA4YTY1N2ZhMDhmNjIwNTk4OTI2MDYxZWU4NDg1Y2Q=
In fact, the Wall Street Journal was harping about this ten years ago. No one listened because no one wanted to know about it. They were too busy getting rich together.
I still have much to learn about F&F.
However, I do know that back in the late 1980′s, the scuzziest characters ever had infomercials on TV about buying properties with government FHA loans, doing a quick paint job and selling or renting for double or triple the price. Rent too high? Blame the Feds.
Government creates the problem then rushes forward to solve it.
A few principles I’d like to see implemented.
1. NO GOLDEN PARACHUTES for executives of companies that lose money. They should forfeit all their assets for their mismanagement, fraud and incompetence. This is a job for shareholder groups to take on after the election. For now, every dime F&F execs made should be taken to pay back the taxpayers.
2. If a government agency does an excellent job and say, cuts employees, doing more with less, the head of that agency should be given a second related agency to run. That will put an end to the empire-building done by DC bureaucrats. The agencies that gave me this idea were the well-runHEALTH & HUMAN SERVICES vs. the scandal-ridden HOUSING AND URBAN DEVELOPMENT mess, until recently run by a Black crony of George Bush’s from Texas. Has any President ever brought so many cronies to DC who turned out to be a disaster? Michael Brown of Fema, Karen Hughes, Albert Gonzales, and on and on?
3. We have only 56 days in which to make our ire known and demand that Congress take action NOW!. NOT after the election. After the election , the political class will go back to paying attention only to their biggest contributors.
4. All of the work that the Democrat-controlled Congress and Senate didn’t take care of in the past two years can be voted on now if we pressure the Congress hard enough. Gingrich is coming out with a book DRILL HERE, DRILL NOW, and a DVD called WE HAVE THE POWER. A health plan and education plan are also in the works.
5. All coastal citizens should be told that the land the oil companies lease, belongs to them and they should get a royalty as the Alaskans do. (This proposal has not been approved by the Iraqi congress because when it does it will change their politics forever if a future administration tries to rescind it.
6. The 3 television networks were given FREE access to BANDWIDTH that also belongs to the American people. They have never paid for it They promised to provide news, documentaries and public service in return for the bandwidth. I’d like to see that preference and advantage rescinded. The nets have not been worthy stewards of the public interest. Especially, of late.
It’s the Democrat party’s Enron, which is why it will never make it to the MSM.
guys, thats it- CLINTON’S EMPIRE
they are responsible for all major failures in american politics and they in fact designed them
in 1996 before clinton got reelected
there were rumors that some people have tapes for sale that p[rove his association with russian intelligence that began in 1960s in Prague
i begin to understand why american enemies were so sure our financial system is going to bite the dust
Sandra M:
very good!! All makes sense! God Bless
Tom, you who. You and Pajamas are missing the real story here…..the Feds are letting the equity holders flounder but saving the the debt holders—-as in the Sovereign Wealth Funds who hold much of the bonds from the Middle East and else where at Fannie and Freddie. Hank Paulson had no choice but to buoy up the bond holders from afar so they would continue to invest in America’s debt.
In the banking business there is one iron-clad law: no bank, on its own, can pay off all its depositors at the same time. Banking works only when depositors have confidence in the bank’s solvency. There are quite a number of banks out there whose solvency is now burdened by huge amounts of foreclosed loans and deflating house values.
Fannie and Freddie held the bulk of these loans. If they fell do you think any of those other banks with solvency problems could stand? If those other banks fell could you tell if your bank might not be next? If you were in doubt, what would you do?
The only people living in America who know first hand what a bank panic is are now in their eighties and nineties. Almost everybody else, except economic professionals, are clueless about how much our entire system of private equities is based on investor trust and confidence, and how fragile that confidence truly is. All that has to happen to bring down all the dominoes is for a sufficient number of depositors and investors to decide to get liquid at the same time.
The ultimate guarantor of the solvency of the entire equities market is the United States Government. Every facet of government involvement in all private equities ultimately has one major end: to prevent investor panic and a stampede to get liquid. All other ends are subordinate to this one.
No matter how badly any financial institution has been run the government must always act swiftly and boldly to intervene, no matter how much it may cost the taxpayers. Afterward it can investigate for fraud, or do anything else it needs to, but a timid government is a government that is undermining confidence across the board through all equities exchange.
It is far more important now than it ever has been. In the 1930′s, when the bulk of government intervention started, the government was itself relatively debt free. It is so no longer. And it’s debt has expanded exponentially based on the current Administration’s philosophy that “deficits don’t matter”.
There is no logical reason why there could not be a run to get liquid among holders of US Treasury bills, too, though this is highly unlikely.
Unlikely, but not impossible, and that is one of the reasons [there are others] why deficits do matter despite Dick Cheney’s cavalier assertion to the contrary.
Joseph Marshall:
this is all very true and will result in either a crisis or a managed crisis when USA dollar will have to be totally `redesigned`
Thanks, Kabud for the kind words.
I left out
#7. If a business is proven to have defrauded the Federal Government, it will be prevented from doing business with the government again.
I think there is a voters’ revolt taking place at bailouts of the irresponsible. An “everyman” Joe Caruso spoke to this issue on Cavuto today. I think millions of people agree. And it comes at a bad, bad time for the Democrats and the fat cats. This is a time when people are getting together at phone banks and in political meetings and the Republican reform movement will probably surge ahead of the RINOs. . Newt’s book and film on energy will be influential, as he will be on education and health. The flat tax is also coming back as an idea.
These are exciting times and it doesn’t matter what the Soviets planned. It won’t work!!
Since this happened under Bush, he must take responsibility for this and most of the sub prime fiasco. I’m sick of all the ninnies, when confronted with another Bush screw up, cry “Bush Dernagement Syndrome”, as if that is going to make it all go away! If you want to be the boss, you get the blame!
Your wrong, Javelin. It started under Clinton.
Have you read this Harvard study? For more information please go to: http://www.jchs.harvard.edu/publications/markets/son2006/index.htm.
Some facts in the report: According to the Joint Center for Housing Studies of Harvard University, “Accounting for nearly two-thirds of household growth in 1995 to 2005, minorities contributed 49 percent of the 12.5 million rise in homeowners over the decade.” . . . “Without the sudden expansion of subprime lending, most of these homeowners would have been denied access to credit.”
The Harvard study reports that in 2004 high-income minority communities (more than 50% minority) have about 19% of all mortgages as high-cost (i.e. sub-prime) mortgages compared to 7% for predominantly white. They have 25% vs. 12% in moderate income communities and 28% to 18% in Low-income areas.
Subprime grew from $35 billion in 1994, $125 billion in 1997, $210 billion in 2001 to $625 billion in 2005 representing 20% of the dollar value of loans and 7% of originations of outstanding mortgages. By 2008 there were $1 trillion in sub-prime loans.
What people fail to understand is the nature of this meltdown. It is called sub-prime because the loans were to people who had poor credit ratings. In an attempt to close the “housing gap” between whites and minorities political pressure was brought to bear on mortgage originators to lower their standards.
As a Postal worker in a small town in Vermont earlier in the decade I remember being completely flummoxed when, though a small starter home, the home was purchased, and, upon the influx of mail, seeing unemployment or other public assistance payments. I would naturally think too myself; how does someone buy a house when they don’t even have a job? Now I understand.
I agree hold hearty with Tom Bumer …. this is a real Bumer .
Now Nehman has failed or down 45 % in day added to Bear Stern and now Fan and Fred .The big 3 Auto Cos could well be next .
We are headed to a terrible landing to who knows where no matter who is President .
What makes all this far worse it that this BAIL OUT was started to help low Middle class and bad debt paying middle class get home loans .
But this Bail out fixes Nothing at all sense those not paying their home loans will now only buy time but their INCOME in three years will not be enough to pay a 100 % of those loans .
Plus who wants to own those low Mortgage rates or Cos holding them . This so called Fix is pure Insanity no matter who goes to prison .
“State Sponsored Socialism” does not work ….. Duh !
palintropos,
Always some one else’s fault, say the losers and the Bush lovers. Bosses are responsible if it happens under their watch. Clinton was out of office 7 years so if Bush and his team were so weak or indifferent that they missed it, it’s their fault.
Too Sarah M.
2. If a government agency does an excellent job and say, cuts employees, doing more with less, the head of that agency should be given a second related agency to run. That will put an end to the empire-building done by DC bureaucrats. The agencies that gave me this idea were the well-runHEALTH & HUMAN SERVICES vs. the scandal-ridden HOUSING AND URBAN DEVELOPMENT mess, until recently run by a Black crony of George Bush’s from Texas. Has any President ever brought so many cronies to DC who turned out to be a disaster? Michael Brown of Fema, Karen Hughes, Albert Gonzales, and on and on?
___________________________________________
What are you Smoking ? Left handed Liberal no label Ciggs obviously .
First off ”YOUR BOY ”Bill Clinton Hired The thief “”"Rain’s”" Who was finally Fired bye Bush .Yet he made 52 million dollars while Fred failed and the Insurance paid off his Huge Fines .The Other Clown worked for OBAMA … CLINTON HIRED (fan)AS WELL with the other bail out .21 Liberals got highly questions loans from Country wide who him self is a far left Liberal !
My ex girl friend worked the “”Horrible run Health and Human Services .
It is one Giant Fraud !
AS For Michael Brown ….. the State was run by a Liberal mayor and a stupid Gov !
Bush told them to leave the city .The Mayor put those poor welfare families in the super dome with no food or water available !
Enron gave RePub’s 2. 6 % more Campaign money that they did Liberals .
Don’t let the Truth ” get in the way of Liberal Lies .
When COS cut Jobs you Liberals go crazy .. Govt hiring and getting bigger is terrible .If Govt was run like Exxon , America could save 20 % cost of tax payer monies .
You need to keep posting on the Daily Kos ….. many on this web sight are smart and are reason , common sense and fact driven not emotion and Feeling very Liberal driven .
TOO Javelin:
You said ?
Always some one else’s fault, say the losers and the Bush lovers. Bosses are responsible if it happens under their watch. Clinton was out of office 7 years so if Bush and his team were so weak or indifferent that they missed it, it’s their fault.
___________________________________
You have a moronic point ! 9/11 was ”created “”by Clinton not taking out Bin Laden three different times .Bush didn’t create terrorism or the worst storms in American history .
So if Bush went alone with Nancy Polosi to help the middle class I though you Liberals were all about then Clinton is the reason he gave us the FAIR TRADE AGREEMENT LIBERALS AND OBOMA WANTS TO END .
Of course how can we forget AL Gore gave us the COMPUTER IND AND GLOBAL WARNING ….. BOTH HOAXES !
If Bush has said we are not helping the middle class you far left Liberals and your best friends the MEDIA would have been on that like Flys on Cow Pods .
Hell BECAUSE OF YOUR BOY CLINTON … I don’t even calla BJ sex anymore .IT is now called “”IS ” !
no one, and i repeat, no one should be able to buy something they cannot qualify to pay for. these unscrupilous realitors, home loans institutions, banks and fund operators are ALL greedy b*****ds who have prayed upon the tax payers of this country. they have surely been aware that the compANIES THEY HAVE RUN CANNOT be allowed to go under. this should be evidence of a conspericy and subject to legal action. they should be arrested and put on trial and made an example of, this would send a message to any other individuals WHO harbor thoughts of floating shady schemes. WE have had enough of these people (i use this term loosely)screwing us to get rich.
this data has alot to do with our current crisis on wall street.
http://www.sec.gov/foia/failsreports/cnsp_sec_fails_2008q2.zip
first quarter data showed roughly 64 billion fails to deliver
second quarter shows roughly 2 billion more or 66 billion fails to deliver.
these are unsettled trades.
sec. 17 a securities act ( i think that the right one.)
http://www.surveygizmo.com/s/66538/wall-street-fraud
Hard to see where the fault lies with Bush.
These GSEs are independent of the Executive branch of government and were created by Congress and governed by their laws. Bush probably did sign off some legislation that he should have vetoed but he hardly vetoed anything – there is one Bush failure we can agree upon.
I wish people would do some more research on all of this. There’s a whole lot more out there if you just look. Bush couldn’t stop it because if he did guess what he’d be called? It begins with an R.
BOSTON, Oct. 13, 1999 (Reuters) – “The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership in underserved groups.
‘We need to push into these underserved markets as much as we can,’ said David Glenn, president and chief operating officer of Freddie Mac. Glenn made his remarks at the annual convention of the U.S. Mortgage Banker Association of America (MBA) this week.
Freddie Mac, like its sister agency Fannie Mae, is a government-chartered corporation that buys mortgages from banks and packages them into securities for investors.
In September, Freddie Mac launched a new lending program, based on research done in collaboration with five black colleges, to bring more African-Americans into the market.
The call for greater efforts to broaden minority home ownership comes at a time when interest rates are pinching mortgages. A record $1.5 trillion mortgages were granted in 1998 in a refinancing boom fueled by the lowest interest rates in nearly three decades.
The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories.
Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low-and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets.
(Based on Reuters, via Builders On-Line 10/13/99, by Richard Leong)[deadlink http://builder.hw.net/news/1999/oct/13/mort13.htx ]
Heads better roll on this one. Seems to me that a lot of Dems have a hand in this. I suppose that’s why it’s been kept on the QT. I want anyone who is responsible for this in any way, shape or form to be held accountable and punished GREATLY. I don’t care what letter they have in front of their names. I want their heads on a platter. STAT.
Webutante: I became aware of what you mentioned after putting the column to bed. I’m going to bo following it to the extent I can. Bondholders are normally protected ahead of equity holders anyway, but the nature of the situation is still very troubling.
I’m glad the CEOs lost their jobs, but they should have lost their executive pay packages. You shouldn’t get rewarded for stewarding your company into the biggest government takeover in history. Not only little bit.
freddie & Fannie were notorious for their heavy Washington lobbying. They bought the support of Congressmen & Senators who managed to get onto the financial oversight committees so that they would be in a position to collect campaign financing from Wall street that wanted to make sure that no real regulation would take place. Fan & Fred have have been loading up on risky mortgages for ages, under-stating the risks largely to increase their stock price so that their CEO’s can pay themselves tens of millions of dollars in salary & stock options. Now they are essentially insolvent, as the principal itself is in question. There was widespread criticism of this year after year. Why was nothing done? Answer is below:
“Capital must protect itself in every way….Debts must be collected and loans and mortgages foreclosed as soon as possible. When trough a process of law the common people have lost their homes, they will be more tractable and more easily Governed by the strong arm of the law applied by the Central power leading financiers. People without homes will not quarrel with their leaders. This is well known among our principle men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the-common herd.”__JP Morgan