The Great Depression Online




Great Depression Online Archive Issue:

A Good Man in a Bad Trade

Great Depression Online
Long Beach, CA
April 28, 2009

Inside This Issue You Will Discover…

*** The Other FDR
*** The Anatomy of a Swindler
*** FDR’s Raw Deal
*** And More

A Good Man in a Bad Trade

We pause from our regular commentary to lament the passing of Freddie Mac CFO David Kellermann.  We never met the guy.  In fact, until we learned of his suicide last Wednesday…we’d never heard of him.  But from what we gather he was a good man in a bad trade.

From the Washington Post…

“Kellermann has figured in several recent controversies at Freddie Mac.  He and a group of company lawyers tussled with the company’s regulator in early March as the firm prepared to file its quarterly disclosure.  The group insisted that Freddie Mac disclose the $30 billion cost to the company of carrying out the Obama administration’s housing recovery plan, but the regulator urged the company not to do so.

“Freddie Mac employees argued they had a legal obligation to disclose the information and would have to get the Securities and Exchange Commission, which oversees such disclosures, to sign off if they didn’t.  The regulator backed down.”

In an industry that scoffs at virtues of honesty, integrity, and trust, doing the right thing unfortunately came at an unbearable price for Kellermann.  In such an unfavorable predicament, the prudent action would have been to flip the bird to the blowhards in Congress who encouraged Freddie Mac malpractices, tell his cohorts ‘take this job and shove it,’ and move his family as far from Washington as possible…perhaps Los Angeles or Miami.

Alas, he was ‘not to be.’

Here we’ll end any further rumination.  Instead, we’ll republish an illustrative piece of how the mess Kellermann was left to cleanup was created.  This first ran in the September 30, 2008 GDO, under the title, “FDR’s Raw Deal.”  Enjoy!

The Other FDR

Today we take a break from all the coverage of the colossal bail out to consider one of the many comedic subplots that has been obscured by all the up-to-the-minute excitement of the financial fiasco. 

Of the many colorful characters – the Fed, the Treasury Secretary, the President, Christopher Cox, Barney Frank – we could’ve contemplated, here we single out one man…the burden of this letter falls squarely on the droopy shoulders of FDR. 

But not the FDR you’re likely thinking of. 

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~~~~~~~~~~~~~~~~~~~~~~~~~

While that FDR – the thirty-second U.S. President – was responsible for setting up Fannie Mae, today we set our sights on the FDR that was responsible for running it into the ground…Franklin Delano Raines.

The Anatomy of a Swindler

The son of a Seattle janitor, FDR grew up knowing what it was like to have not…and at a young age concluded that it was better to have.  Yet it was the time spent mixing with the Ivy Leaguers at Harvard University and Harvard Law School where he refined his thinking and came to the belief that the government should be responsible to correct this perceived injustice.

FDR came out of school with the wide eyed ambition of a lab rat…determined to sniff out his way to wealth, and once and for all, find that ever illusive cheese at the end of the maze.

The first corner he peered around smelled remarkably prospective…unfortunately, the three years served in the Carter Administration didn’t offer the compensation he’d dreamed of.  To have was better, remember, and the next corner he peered around was much more lucrative…FDR did an 11 year stint at an investment bank.

But it was in 1991 when FDR got his big break.  For it was then that he became Fannie Mae’s Vice Chairman, and it was then that he garnered hands on access to muck with the lives of millions.  Still, he wasn’t quite sure how to go about it.

To learn such tips and tricks, FDR studied one of the true masters of our time…Bill Clinton.  From 1996 to 1998, he was the Clinton Administration’s Director of the U.S. Office of Management and Budget.  And it was there he discovered that you must have a vision…a mission…a delusion that is so grand and so absurd, that the world will love you for it.

One evening, in the autumn of 1997 it came to him in a flash.  Staring deep into the pot of his chicken soup, just as it approached boil, he hallucinated an image of a house.  Suddenly a small part of the grey matter of his brain opened up… 

For where Hoover had foreseen a chicken in every pot and a car in every garage, FDR now foresaw much, much more.  A chicken and a car were not good enough, he rationalized…everyone should also get a house with a pot to cook the chicken in and a garage to park the car in.  And he knew just how to give it to them.

Yet best of all, FDR also knew he could become remarkably rich pawning houses to the downtrodden.  So in 1999, he returned to Fannie Mae as CEO and got to work on his master plan.

FDR’s Raw Deal

It was a pretty simple plan from the get go…

If low interest rates make housing more affordable, then even lower interest rates make housing even more affordable. 

So, too, if 20 percent down put housing out of reach for some, then 10 percent down was better…and zero percent down was optimal.

Similarly, if a borrower’s credit score doesn’t meet the needed credit standard, just relax the standard.

And lastly, if a borrower’s income is too low to qualify for a loan, just let them state what ever income it is that they must have to get the loan.

With the ground rules in place by 1999, FDR began the pilot program that would ultimately ruin the finances of the western world.  It involved issuing bank loans to low to moderate income people, and to ease credit requirements on loans that Fannie Mae purchased from banks.

FDR promoted the program stating that it would allow consumers who were “A notch below what our current underwriting has required” get a home.

Here’s how it worked…

Banks made loans to people to buy houses they really couldn’t afford.  Fannie Mae bought the bad loans and bundled them together with good ones as mortgage backed securities.  Wall Street then bought these mortgage backed securities, rated them AAA, and then sold them the world over…taking a nice cut for their services.

FDR had a heavy hand in the action too.  By overstating earnings, and shifting losses, he pocketed the large bonuses a janitor’s son could only dream of.  In fact, according to a September 19, 2008 article by Jonah Goldberg, published in the National Review Online, FDR “…made $52 million of his $90 million compensation package thanks in part to fraudulent earnings statements.”

Efforts to reform the scheme were stopped by the Democrats in Congress, who weren’t ready to give up the gravy train of money that flowed from Fannie Mae to their campaigns.  “Barack Obama, the Senate’s second-greatest recipient of donations from Fannie and Freddie after [Christopher] Dodd, did nothing.”

Now, thanks to the handy work of FDR’s Raw Deal, the have not’s are stuck trying to get by paying a mortgage on a house they really can’t afford.  And after the takeover of Fannie Mae and Freddie Mac, that payment will be going directly to the government.  Alas, in a sort of sinister irony, half the country’s now living in government-subsidized housing projects.

Sincerely,

M.N. Gordon
Great Depression Online

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