Monday, July 14, 2008

ERM-BC-COOP: Mortgage mess

The "mortgage mess," of which Freddie Mac and Fannie Mae are the most recent focus of attention (along with IndyMac Bank) is the headline du jour.

Fannie Mae initially chartered in 1938 under Franklin Roosevelt was re-chartered in 1968 by Congress as a shareholder-owned company, funded solely with private capital raised from investors on Wall Street and around the world.

Freddie Mac was established by Congress as the Federal Home Loan Mortgage Corporation Act and is a stockholder-owned organization.

Both organizations are charged with using private funds, vs. having the full faith and backing of the Federal government as do Treasury notes.

Both are Federally regulated, as - to a less hands-on extent - is IndyMac of California.

So how could Fannie Mae and Freddie Mac find themselves in a financial fix that Washington is talking about bailing them out.

Easy. Things happened which were beyond the organizations' control.

Does that mean the organizations are without fault.


Indeed, Freddie Mac claims that it is "subject to rigorous governmental oversight and substantial capital requirements."

From Freddie Mac's page:

"Freddie Mac operates in a single, safe business: residential mortgages backed by the equity of millions of American homes across the nation. Freddie Mac is subject to rigorous governmental oversight and substantial capital requirements, and our financial disclosures surpass those of other large institutions. These practices ensure that our business is financially transparent and accountable to our shareholders, regulators and the American public."

Somewhere, something went very wrong with the "rigorous governmental oversight and substantial capital requirements."

Could this have been prevented?

Perhaps not completely, but it probably could have been mitigated with a hard-look enterprise risk management program.

"Hard look" because, in our generally Pollyanna world, few are willing to look at, and seriously consider, all the threats to our organization.

The Corporation (Freddie Mac) may not make any capital distribution that would decrease the total capital of the Corporation (as such term is defined in section 1303 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992) to an amount less than the risk-based capital level for the Corporation established under section 1361 of such Act or that would decrease the core capital of the Corporation (as such term is defined in section 1303 of such Act) to an amount less than the minimum capital level for the Corporation established under section 1362 of such Act, without prior written approval of the distribution by the Director of the Office of Federal Housing Enterprise Oversight of the Department of Housing and Urban Development. (Federal Home Loan Mortgage Corporation Act, 12 U.S.C. § 1451)

The fall out following the 9-11 (2001) attack with our own resources was finger-pointing and finally an admission that, within the Federal government (and elsewhere) "the right had doesn't know what the left is doing"; there is little inter-organization communication. Turf wars gave the enemy his opportunity.

It is hard to believe that the same thing didn't happen again.

The financial crisis didn't happen overnight.

I am an enterprise risk management practitioner. I am not a financial analyst; I am not chair of the Federal Reserve or even a bank clerk. Knowing my limitations, I know I need to turn to financial Subject Matter Experts (SMEs) and, in the financial world, they are in abundance.

So why didn't anyone ask - or if they DID ask, why didn't they listen to - the SMEs?

This "collapse" didn't happen overnight.

The beginning as I see it - and again, I am not a financial guru who could see "the signs" of things to come - was the Real Estate Investment Trust (REIT) woes that brought down several financial houses.

That followed by Wall Street's embarrassments and commercial banks' losses.

(My retirement account has been sufficiently decreased to force me to work "extra innings." I am not a happy camper.)

My question has to be - since this was hardly an overnight event - why some mitigation efforts were implemented to stem the flow of red ink?

But it's easier to say that "everything will be all right."


Head-in-sand syndrome.

I don't doubt we'll weather the storm, but it seems to me that facing reality "then" could have prevented, or at least mitigated, the financial reality we are facing today.

(Never mind that this Wall Street outsider thinks most traders are lemmings who would follow any perceived leader.)

John Glenn, MBCI, SRP
Enterprise Risk Management/Business Continuity
Planner @

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