Fannie, Countrywide, and Goldman Sachs

Obama turns to trusted political insider Jim Johnson for key campaign role
...In the last year, Johnson, who once was a member of an organization known as Friends of Hillary, has become tightly tied to the presidential campaign of Barack Obama. It's Johnson's job to vet potential vice presidential candidates for Obama, a duty he also performed for Walter Mondale, who ended up running with Geraldine Ferraro in 1984, and John Kerry, who ended up with John Edwards, four years ago. ...

...In 1990, Johnson went to work for the Federal National Mortgage Association (Fannie Mae) and quickly became its $5 million-a-year chairman. His compensation rose to a reported $21 million by his final year, 1998. ...

...Given Fannie Mae's largess, it's likely no coincidence that Johnson was chairman of the Kennedy Center and the Brookings Institution at the time he was heading Fannie Mae. During this period, he was known in D.C.'s inner circles as "chairman of the universe.'' ...

...When he left his job at Fannie Mae, which long has had a reputation as a cushy landing spot for the political class in Washington, he was serenaded by 16 members of the Benson High band, which had been flown to D.C. at Fannie Mae's expense. He also received a number of perks, including a $600,000 annual consulting fee.

It should be noted that Johnson got out of Fannie Mae while the getting was good. Since his leaving, the massive, quasi-public home mortgage organization has been buffeted by negative headlines. Accounting scandals, dating back to Johnson's era, have been followed by recent news that Fannie Mae has lost more than $3 billion in the housing slump.....

Franklin Raines
On Labor Day, he was a favorite to be Treasury Secretary should John Kerry win the White House. At yearend, he had left under a cloud. The charmed career of Franklin D. Raines -- a poor kid from Seattle who climbed through Harvard and a Rhodes Scholarship to become White House budget director and CEO of Fannie Mae (FNM ) -- crashed to a halt on Dec. 21. That was six days after the Securities & Exchange Commission's top accountant declared that mortgage giant Fannie misstated earnings for 3 1/2 years, leading to an estimated $9 billion restatement that will wipe out 40% of profits from 2001 to mid-2004.

Supporters of Raines, 55, insisted that he wasn't culpable for Fannie's misuse of obscure accounting standards. But that argument didn't wash. Raines was in charge in 2001, when Fannie chose to create what the SEC dryly called "its own unique methodology" to calculate the earnings impact of its trillion-dollar portfolio of derivatives. Raines gave Chief Financial Officer J. Timothy Howard free rein and tolerated "weak or nonexistent" financial controls, according to a scathing report issued in September by the Office of Federal Housing Enterprise Oversight, Fannie's regulator....

Washington and Wall Street: The Revolving Door
...The mortgage agencies’ government backing was, in effect, a valuable subsidy, which was used by Fannie’s C.E.O., James A. Johnson, to increase home ownership while enriching himself and other executives. A 1996 study by the Congressional Budget Office found that Fannie pocketed about a third of the subsidy rather than passing it on to homeowners. Over his nine years heading Fannie, Johnson personally took home roughly $100 million. His successor, Franklin D. Raines, was treated no less lavishly. ...

...A company called Countrywide Financial became Fannie’s single largest provider of home loans and the nation’s largest mortgage lender. Countrywide abandoned standards altogether, even doctoring loans to make applicants look creditworthy, while generating a fortune for its co-founder, Angelo R. Mozilo. Meanwhile, Wall Street banks received fat fees underwriting securities issued by Fannie and Freddie, and even more money providing lenders like Countrywide with lines of credit to expand their risky lending and then bundling the mortgages into securities they peddled to their clients. The Street, Morgenson and Rosner say, knew lending standards were declining but maintained the charade because it was so profitable. Goldman Sachs even used its own money to bet against the bundles — making huge profits off the losses of its clients on the very securities it had marketed to them. Eventually, of course, everything came crashing down. ...

The Law & Economics of Subprime Lending
...It appears that this aggressive expansion of Fannie Mae and Freddie Mac into subprime lending was a political strategy adopted by their leaders in response to heightened congressional scrutiny and criticism in the wake of the accounting scandals at the agencies that emerged during 2003 to 2004 and which threatened to lead to a revocation of their favored status as government-sponsored enterprises. Fannie and Freddie aggressively restyled their lending operations as the promotion of affordable housing and actively encouraged retail lenders to generate mortgages with those characteristics. As a result, not only did the number of subprime loans explode in the 2005 to 2007 period, but a disproportionate number of these loans were made to the riskiest borrowers or had extremely high risk characteristics, such as negative amortization, interest-only, high-LTV, or very low FICO scores....

Goldman Sachs Needs a New Audit Committee
...James Johnson, a Goldman director since 1999, was CEO of Fannie Mae from 1991 to 1998. An internal Fannie probe in 2006 led by former U.S. Senator Warren Rudman identified several accounting violations that occurred on Johnson’s watch. ...

Fannie Mae’s Johnson Was ‘Pied Piper,’ Drove U.S. Off Housing Cliff: Books
James A. Johnson cuts a powerful figure as he makes his way around Wall Street and Washington in horn-rimmed glasses.

He’s a man of prestige: vice chairman of private-equity firm Perseus LLC; head of the compensation committee at Goldman Sachs Group Inc. (GS); former adviser to Democratic presidential aspirants including, briefly, Barack Obama. ...

...Drawing on more than a decade of reporting, Morgenson and Rosner argue that Johnson laid out a blueprint for other institutions, from mortgage lender Countrywide Financial Corp. to Goldman Sachs. In his lobbying to preserve Fannie Mae’s government ties, Johnson showed bankers “how to control their controllers and produce the outcome they desired: lax regulation and freedom from any restraints that might hamper their risk taking and curb their personal wealth creation.” ...

...Ensconced in its colonial-style headquarters in Washington D.C., Fannie Mae automated its lending process, eliminating traditional due diligence, the authors say. It lowered standards, both on down payments and acceptable ratios between a borrower’s monthly mortgage payment and his or her income, they write. ..

...We’re reminded, for example, of the “deeply symbiotic relationship” between Johnson and Angelo Mozilo, the tanned and French-cuffed CEO of Countrywide, which became Fannie Mae’s largest loan provider. ...

Countrywide Friends Got Good Loans
Countrywide Financial Corp. makes mortgage loans through a vast network of offices, brokers and call centers. But a few customers have gotten their loans a special way: through Countrywide Chief Executive Angelo Mozilo.

These borrowers, known internally as "friends of Angelo" or FoA, include two former CEOs of Fannie Mae, the biggest buyer of Countrywide's mortgages, say people familiar with the matter.

One was James Johnson, a longtime Democratic Party power and an adviser to Sen. Barack Obama's campaign, who this past week was named to a panel that is vetting running-mate possibilities for the presumed nominee. Another was Franklin Raines, a onetime Clinton administration budget director, who left Fannie Mae amid an accounting scandal in 2004....

...Mr. Johnson returned to Countrywide several times to finance his growing real-estate holdings. In November 2001, he received a Countrywide loan of $1.3 million for a home in Palm Desert, Calif. The rate was 5.250% for five years, then became adjustable. Rates on such loans averaged about 6% to 6.2% about that time, HSH says.

In June 2003, Mr. Johnson obtained a $971,650 mortgage on a house in upper northwest Washington, D.C., with a rate of 3.875% for the first five years. About that time, the market average was about 4.3% to 4.9%, according to HSH.

In January 2006, Mr. Johnson got a $5 million home-equity line of credit from Countrywide on a residence in Ketchum, Idaho, near the Sun Valley ski resort. And in December 2007 he received a Countrywide home-equity line of credit for $1.01 million and executed a $1 million promissory note in connection with that home.

Asked about the loans, a lawyer for Mr. Johnson, Brian Brooks, wrote that "it appears that the arrangements you cite are well within the band of standard industry practices with regard to price and structure of loans to borrowers of Mr. Johnson's background." Mr. Johnson is now vice chairman of Perseus LLC, a merchant bank with offices in Washington and New York.

Mr. Raines, who succeeded Mr. Johnson at Fannie's helm at the end of 1998, became a repeat customer of Countrywide while he was CEO. Two days before Christmas in 1999, Mr. Raines got a $1 million loan on his house in upper northwest Washington, D.C., refinancing it in November 2001. Property records don't show the interest rate in either case.

In April 2003, Mr. Raines refinanced again with Countrywide, this time getting a 5.125% rate for the first 10 years. According to HSH, the average rate for such a loan around that time was about 5.5% to 5.7%.

On July 31, 2003, Mr. Raines refinanced again, this time shaving a full percentage point off his initial rate, to 4.125%. The market rate at that period averaged about 5.1% to 5.4%, HSH data show....

Congress and the Countrywide Scandal
Countrywide Financial Corp.'s "friends of Angelo" program provided sweetheart loans to key banking players in Washington, D.C. They included former Fannie Mae chief executive Jim Johnson, Senate Budget Committee Chairman Kent Conrad (D., N.D.) and Senate Banking Committee Chairman Christopher Dodd (D., Conn.).

The growing scandal surrounding the "friends of Angelo" loans (so-called by company employees, referring to Countrywide CEO Angelo Mozilo) should serve as a political wake-up call. Yet the Senate appears intent on pushing forward legislation, co-authored by Sen. Dodd, that would bail out the worst actors in the subprime mortgage banking industry.

Campaigning in Lancaster, Pa., on March 31, Sen. Barack Obama blamed Countrywide's CEO for "infecting the economy and helping to create a home foreclosure crisis." Yet Rep. Barney Frank (D., Mass.) and Mr. Dodd have crafted a bill to provide $300 billion in new taxpayer loan guarantees to Countrywide and others. The bill will allow troubled financial institutions to foist the riskiest mortgages in their portfolios onto the Federal Housing Administration (FHA) -- ultimately putting the American taxpayer on the hook for their bad bets....

Docs Show Countrywide's Cozy Ties to Fannie Mae
The partnership between Countrywide and government-backed Fannie Mae is partly to blame for the housing crisis. They made billions buying and selling each other's toxic loans.

But as they were sending America's housing market down the tubes, CBS News investigative correspondent Sharyl Attkisson reports new documents show Countrywide and Fannie Mae were quietly scratching each other's backs.

Rep. Darrell Issa, (R-Calif.) the ranking member of the House Committee on Oversight and Government Reform, says to sweeten the deal, Countrywide gave dozens of top Fannie Mae officials VIP loans and special treatment that often included discounts worth many thousands of dollars.

Taxpayers lost out. They've kicked in $84 billion so far for Fannie Mae's bad decisions. But for the well-paid executives, things turned out okay.

Documents provided to Congress under subpoena show Jim Johnson, who made $21 million as Fannie Mae CEO, took $10 million dollars in VIP Countrywide loans. Other Fannie Mae executives who got VIP loans from Countrywide include: then-Vice Chair Jamie Gorelick, who earned $26 million over four years at Fannie Mae and now represents BP. And former CEO Franklin Raines who earned $90 million dollars in his five years at Fannie Mae. The amounts of their loans aren't known....

...In all, documents show at least 42 Fannie Mae officials took 153 VIP loans from Countrywide - sometimes three and four loans per person.

In one 2001 email, Countrywide officials talk about giving a below market loan to Fannie Mae's then-COO Dan Mudd: "make sure the branch and Regional Vice President understand the sensitivity of this deal. We are already taking a loss, it would be horrible to add a service complaint on top and lose any benefit we generate."...

Fannie’s Cozy Ties to Countrywide
...What's ironic in retrospect is that Countrywide was all too happy to sell its subprime mortgages to Fannie, whether or not its top executives bonded on the back nine. The mortgage finance behemoth bought more loans from Countrywide than any other lender—Countrywide accounted for 28% of Fannie's mortgages purchases in 2007, and Fannie's eagerness to soak up those high-risk loans enabled Countrywide to sell even more shaky mortgages....

It Looks Like Fannie Had Some Help
...Securities & Exchange Commission staff members are looking into deals in which Goldman Sachs Group (GS ), among others, allegedly helped Fannie rearrange earnings to maintain the appearance of steady profit growth, according to people familiar with the inquiries. Investigators also are scrutinizing KPMG, which, as Fannie's outside auditor, approved financial statements since deemed misleading. And the SEC staff is examining deals designed by Lehman Brothers Inc. (LEH ) and later executed by KPMG that the Internal Revenue Service has determined improperly deferred taxes.

The list goes on. Referring to one arrangement that could come back to haunt insurer Radian Group Inc., a Fannie official wrote in a Jan. 9, 2002, internal e-mail: "I am terrified of the negative public-relations aspects of a disclosure of a transaction like this."...

...SEC Chairman Christopher Cox has told reporters, without getting specific, that people and "entities whose actions and inactions" contributed to the Fannie debacle will be "vigorously pursued." Ex-CEO Franklin D. Raines and other current and former top Fannie officials are among those facing potential civil and even criminal charges, federal officials say. Raines has denied wrongdoing. Wary of the collapse of an entire company, as happened after the Enron-related prosecution of auditor Arthur Andersen, the government is expected to stick to civil actions if it moves against businesses that advised Fannie, according to a knowledgeable federal official.

Regulators say a big motive behind the generation of Fannie's illusory double-digit annual profit growth was the outsize bonuses those figures triggered for Raines and his deputies. Fannie fine-tuned its earnings to the "one-hundredth of a penny" to maximize those bonuses, according to James B. Lockhart, acting director of Fannie's special overseer, the Office of Federal Housing Enterprise Oversight (OFHEO).

Some of the more creative methods for massaging the numbers came from outside the company, OFHEO said in a 340-page report issued by after a nearly three-year investigation. The report alleges a cornucopia of dubious deals, a number of which delayed the acknowledgment of earnings so that profits would rise smoothly and predictably.

Many of the transactions involved mortgage-backed securities, Fannie's stock in trade. The government-chartered company helps boost the amount of cash available for mortgage loans by buying loans from lenders and bundling them into securities, which it sells to investors or holds in its own portfolio.

In 2001, Goldman designed a mortgage-backed security that it said in a Nov. 19 presentation would allow Fannie to "better manage the recognition of income" for accounting purposes, according to the OFHEO report. The security allowed Fannie to push $107 million in income to future years, when the company expected a rise in interest rates would depress its earnings. Goldman received $625,000 in fees for one of the two transactions, which OFHEO said "had no significant purpose other than to achieve desired accounting results."...

Examining Fannie Mae
...Investigators found that Fannie Mae's reported earnings per share closely tracked the targets set for executives to receive their maximum bonus payouts....

Countrywide's Underwriters Sued for Fraud by New York Agencies
Three New York agencies sued Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and 23 more underwriters for allegedly helping Countrywide Financial Corp. to defraud investors.

New York's city and state comptrollers and their pension funds added the securities firms, two accounting firms and Countrywide officers and directors as defendants in a federal securities-fraud lawsuit filed against the home lender in August.

``The underwriters and accountants enabled Countrywide to release false statements. Investors lost millions and New Yorkers lost their homes,'' New York State Comptroller Thomas DiNapoli said in a statement....

...The securities and accounting firms and the lender misled investors by ``falsely representing that Countrywide had strict and selective underwriting and loan origination practices, ample liquidity'' and ``a conservative approach that set it apart from other mortgage lenders,'' according to the lawsuit.

Mozilo told investors in March 2007 that the deepening housing crisis would ``be great for Countrywide'' adding that ``at the end of the day, all of the irrational competitors will be gone,'' according to the lawsuit.

Countrywide's growth ``resulted from the company's continuing to aggressively originate risky loans without regard to its stated origination policies and in spite of worsening market conditions,'' according to the lawsuit.

The securities and accounting firms took part in Countrywide's capital raising and financial statements without making a ``reasonable investigation'' of the facts and without exercising ``reasonable care,'' according to the lawsuit. ..