Contrary to the general conception, Fannie Mae is not a bank. Fannie Mae is a government sponsored enterprise (GSE) that purchases and guarantees (insures) mortgages. These mortgages must meet its funding criteria. This process of purchasing and guaranteeing is called “securing” mortgages. In short, Fannie Mae “secures” mortgages, bundles them together, and sells them as something called mortgage-backed securities (MBS). The market for Fannie Mae’s MBS is dangerously large and extremely liquid. Among those who buy up these MBS are pension funds—probably yours, insurance companies and foreign governments. Fannie Mae has its own investment portfolio as well and holds other institutions’ MBS.
Together, Fannie Mae and little brother Freddie Mac purchase or guarantee between 40% and 60% of all the nation’s mortgages. These two mega-companies represent such a large piece of the total American financial market that their collapse would crash the entire US economy and threaten to crash global markets as well.
In 2003 and 2004 reports surfaced of massive accounting problems in both organizations. Soon after, when record numbers of mortgages went into foreclosure, Fannie Mae was headed for failure. What was the solution? Apparently a government bailout financed by the taxpayers.
CEO-Franklin Raines, a respected and accomplished budget director under Bill Clinton, was Fannie Mae’s CEO at the time. He flatly denied that there was any cooking of the books at either organization. But federal regulators discovered that the company’s accountants did not include a crucial element in their numbers. Market volatility was not considered when formulating predictions regarding the viability of the high-risk loans they were purchasing. Raines denied the evidence until the SEC got involved in 2004 and backed up the findings of the federal regulators. Raines resigned.
Even worse than falsifying the books, Fannie and Freddie’s upper management hid the company’s problems in order to protect their huge personal pay bonuses. Raines was compensated to the tune of $20 million a year. Libertarian Fred Smith of the Competitive Enterprise Institute tried to sound the warning years ago, but everyone was making so much money it was easy to move forward in denial. Many of Fannie Mae’s problems were reminiscent of Enron and the Savings and Loan crisis of the 1980’s.
CEO-Franklin Raines recently stated that the current mess at Fannie and Freddie is a result of loans purchased years after his 2004 departure. But the fact is, Fannie and Freddie were put on that slippery slope under Frank Raines’ watch. That is why Franklin Raines is named in the top 10 culprits of the collapse.