All the Devils Are Here [112]
Even Greenspan got involved. He and Raines were social friends, but he simply didn’t buy Fannie’s rationale for its enormous mortgage portfolio. “The explanation they gave was utter nonsense,” Greenspan later said.
The White House assault seemed to embolden the Fed chairman, who began speaking out regularly against Fannie and Freddie. His most pointed comments came in 2004, when he told Congress, “To fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventive actions are required sooner rather than later.” (Fannie, of course, responded in kind; even Greenspan wasn’t immune.)
In the fall of 2004, OFHEO announced the preliminary results of its investigation. Fannie, the agency said, had willfully broken the complex accounting rules surrounding derivatives to facilitate smooth earnings growth. Whereas Freddie had understated its earnings, OFHEO charged Fannie with overstating them and willfully breaking accounting rules.
The clear implication was that Fannie Mae was cooking its books so that the executives could line their pockets. During the previous five years, the company had, indeed, doubled its earnings just as Raines had promised when he first became CEO, generating tens of millions of dollars in management bonuses. OFHEO was now saying that much of that profit was basically the result of accounting fraud. OFHEO also said that Fannie, under Raines, had fostered an environment of “weak or nonexistent internal controls.” Raines responded in a highly unusual way. Throwing down the gauntlet, he demanded that the SEC reinvestigate the company’s accounting.
Fannie had one more trick up its sleeve. An aide to Kit Bond, a Republican senator from Missouri, played poker with Bill Maloni, Fannie’s top lobbyist. Bond sat on the appropriations committee that oversaw OFHEO. Before the results of the OFHEO investigation were made public, Bond sent a letter to HUD’s inspector general, requesting that it investigate not Fannie or Freddie, but OFHEO. (A draft of Bond’s letter, which was nearly identical to the letter that was actually sent, was later found on Fannie Mae’s computer system.) Separately, the committee also called for $10 million of OFHEO’s budget to be withheld until Falcon was removed.
There is no question that OFHEO actions were well beyond the bounds of normal regulatory behavior. Like the White House, it had gone to war with Fannie Mae, leaking damaging information to the press and actively seeking to embarrass the GSEs. To put it bluntly, it was out to get Fannie. Which is precisely what the HUD inspector general wrote in his report.
The inspector general’s report was supposed to be confidential. But Fannie had a long history of strategic leaks itself. Sure enough, just before a key hearing, it managed to get the HUD report into the hands of members of Congress. Not surprisingly, when the hearing began, the committee members went after OFHEO and Falcon instead of Raines.
“This hearing is about the political lynching of Franklin Raines,” said Congressman William Lacy Clay, an African-American Democrat from Missouri.
“Is it possible that by casting all of these aspersions . . . you potentially are weakening this institution in the market, that you are potentially weakening the housing market in this country?” chimed in Congressman Artur Davis, Democrat of Alabama.
In responding to the OFHEO charges, Raines