Tuesday, January 11, 2011

Fannie and Freddie

The reason they failed as told by William Black:

"Fannie and Freddie caused such horrific losses because they were private institutions run by officers who obtained a “sure thing” – great wealth through booking high yield in the near term without establishing meaningful loss reserves. OFHEO and the SEC had blocked Fannie and Freddie’s prior accounting scam (abusive hedge accounting) and limited Fannie and Freddie’s growth. Fannie and Freddie’s officers’ optimal remaining strategy, given OFHEO’s imposition of a constraint on growth, was to maximize reported short-term accounting income by purchasing very high (nominal) yield mortgage paper and not provide adequate loss reserves. Liar’s loans offered the best nominal yield (many subprime loans are also liar’s loans). Fannie and Freddie’s officers profited through the quintessentially private sector method of looting a corporation – executive compensation based on short-term, fictional, reported income followed by catastrophic losses and insolvency."


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