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Stiglitz & Orzag
When Fannie Mae purchases a mortgage from a loan originator, it is repackaged and sold in bundles to investment banks and other entities who market them globally with a credit rating stamp.<ref>True story. You can watch [http://www.hulu.com/watch/59026/cnbc-originals-house-of-cards CNBC's House of Cards special here] to see it; reporter David Faber travels to the small town of Narvik, Norway, which invested $200 million lured in by their AAA ratings and the assurance by Citigroup of their safety. The town has had to close schools, slash expenditure to the elderly, and cut back on fire department hours. </ref>
When Fannie Mae purchases a mortgage from a loan originator, it is repackaged and sold in bundles to investment banks and other entities who market them globally with a credit rating stamp.<ref>True story. You can watch [http://www.hulu.com/watch/59026/cnbc-originals-house-of-cards CNBC's House of Cards special here] to see it; reporter David Faber travels to the small town of Narvik, Norway, which invested $200 million lured in by their AAA ratings and the assurance by Citigroup of their safety. The town has had to close schools, slash expenditure to the elderly, and cut back on fire department hours. </ref>
==Fannie Mae lowers guidelines for subprime borrowers 1999==
==Franklin Raines era==
===Fannie Mae lowers guidelines for subprime borrowers 1999===
:''Main article:'' [[Community Reinvestment Act]]
:''Main article:'' [[Community Reinvestment Act]]
In 1999 Fannie Mae lowered its underwriting guidelines to expand into the subprime lending market,<ref>[http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html Fannie Mae Eases Credit To Aid Mortgage Lending,] Steven A. Holmes, ''New York Times'', September 30, 1999.</ref> a widely held contributing factor to the [[Financial crisis of 2008|Financial crisis of 2007-08]].
In 1999 Fannie Mae lowered its underwriting guidelines to expand into the subprime lending market,<ref>[http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html Fannie Mae Eases Credit To Aid Mortgage Lending,] Steven A. Holmes, ''New York Times'', September 30, 1999.</ref> a widely held contributing factor to the [[Financial crisis of 2008|Financial crisis of 2007-08]].
Countrywide and Fannie Mae further expanded their relationship with another strategic alliance agreement in 2005. During each quarter, Countrywide was required to sell to Fannie Mae at least 70 percent of all “Expanded Criteria Mortgages,” and at least 65 percent of those mortgages each month. Fannie Mae also agreed to “provide special marketing and other assistance” to Countrywide in its efforts to reach low-income borrowers. Both parties pledged to continue a “Favored Relationship” in which they were “committed to the business success of the other party.” The 2005 agreement required both companies to “maintain the complete confidentiality of the existence and terms of this agreement.”
Countrywide and Fannie Mae further expanded their relationship with another strategic alliance agreement in 2005. During each quarter, Countrywide was required to sell to Fannie Mae at least 70 percent of all “Expanded Criteria Mortgages,” and at least 65 percent of those mortgages each month. Fannie Mae also agreed to “provide special marketing and other assistance” to Countrywide in its efforts to reach low-income borrowers. Both parties pledged to continue a “Favored Relationship” in which they were “committed to the business success of the other party.” The 2005 agreement required both companies to “maintain the complete confidentiality of the existence and terms of this agreement.”
==Fraudulent accounting 1990s - 2006==
===Stiglitz and Orzag hired to calm fears===
As worries about Fannie Mae's overexposure for securitizing nearly $1 trillion in debt grew, Raines's Fannie Mae hired Economist [[Joseph Stiglitz]], Clinton's former Special Assistant to the President for Economic Policy [[Peter Orzag]], and the Managing Director of their firm Jonathan Orzag to write a paper to calm fears. The conclusion made the fantastic claim that Fannie Mae's chance of insolvency were 1 in 500,000:
{{QuoteBox...the probability of a shock as severe as embodied in the risk-based capital standard is substantially less than one in
500,000 – and may be smaller than one in three million. Given the low probability of the stress test shock occurring, and assuming that Fannie Mae and Freddie Mac hold sufficient capital to withstand that shock, the exposure of the government to the risk that the GSEs [government sponsored entities Fannie Mae and Freddie Mac] will become insolvent appears quite low.
Given the extremely small probability of default by the GSEs, the expected monetary costs of exposure to GSE insolvency are relatively small — even given very large levels of outstanding GSE debt and assuming that the government would bear the costs of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in
500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.
...In the absence of Fannie Mae and Freddie Mac, mortgage risk would likely be held by large banks and other types of financial
institutions, which themselves benefit from the perception that they are “too big to fail.” Fannie Mae and Freddie Mac are among the largest financial institutions in the country. Even in the absence of a GSE charter it is likely that they would continue to benefit from their size, since the government has intervened on behalf of other large
institutions in the past....<ref>[ http://www.pierrelemieux.org/stiglitzrisk.pdf. Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard,] by Joseph E. Stiglitz, Jonathan M. Orszag and Peter R. Orszag. Fannie Mae Papers, Volume 1, Issue 2, March 2002. </ref>}}
Stiglitz was granted the [[Nobel Prize]] in [[Economics]] for 2001. When Fannie Mae went was declared insolvent in 2008, throwing the planet into a deep economic upheaval for the better part of the next decade, Fannie Mae pulled the paper off its website.<ref>[http://econlog.econlib.org/archives/2009/11/stiglitz_and_or.htmlbStiglitz and Orszags on Fannie Mae,] David Henderson, November 9, 2009. econlog.econlib.org </ref> And after Peter Orzag was was proven disastrously in error with his prediction of 1 in a half million chance of a Fannie Mae meltdown, President [[Barack Obama]] appointed him to manage the government's finances as Director of the Office of Management and Budget.
===Fraudulent accounting exposed===
Franklin Raines served as Fannie Mae's Vice Chairman from 1991 to 1996 when President [[Bill Clinton]]<ref>Bill Clinton appointed [[Rahm Emanuel]], later [[Obama]] Chief of Staff, to the Board of Directors of Fannie Mae's sister agency, Freddie Mac. Emanuel had no experience of qualifications for the position. Freddie Mac likewise was taken into conservatorship for mismanagement.</ref> recruited him to serve in the [[White House]] as Director of the [[Office of Management and Budget]]. In 1998 he returned to Fannie Mae as Chief Executive Officer (CEO). In 2004 the [[Securities & Exchange Commission]]'s (SEC) chief accountant ruled that Fannie had improperly accounted for hedging transactions in its trillion-dollar portfolio of derivatives.<ref>[http://www.businessweek.com/stories/2004-12-21/franklin-rainess-lost-gamble Franklin Raines's Lost Gamble,] ''BloombergBusinessweek'', December 21, 2004. </ref> The SEC ordered it to restate it's earnings which were overstated by $11 billion. The Office of Federal Housing Enterprise Oversight declared the company was "significantly undercapitalized" using Fannie's "own unique methodology" for valuing derivatives. At $28.86 billion, Fannie's core capital was $2.98 billion, or almost 10%, below the required minimum.
Franklin Raines served as Fannie Mae's Vice Chairman from 1991 to 1996 when President [[Bill Clinton]]<ref>Bill Clinton appointed [[Rahm Emanuel]], later [[Obama]] Chief of Staff, to the Board of Directors of Fannie Mae's sister agency, Freddie Mac. Emanuel had no experience of qualifications for the position. Freddie Mac likewise was taken into conservatorship for mismanagement.</ref> recruited him to serve in the [[White House]] as Director of the [[Office of Management and Budget]]. In 1998 he returned to Fannie Mae as Chief Executive Officer (CEO). In 2004 the [[Securities & Exchange Commission]]'s (SEC) chief accountant ruled that Fannie had improperly accounted for hedging transactions in its trillion-dollar portfolio of derivatives.<ref>[http://www.businessweek.com/stories/2004-12-21/franklin-rainess-lost-gamble Franklin Raines's Lost Gamble,] ''BloombergBusinessweek'', December 21, 2004. </ref> The SEC ordered it to restate it's earnings which were overstated by $11 billion. The Office of Federal Housing Enterprise Oversight declared the company was "significantly undercapitalized" using Fannie's "own unique methodology" for valuing derivatives. At $28.86 billion, Fannie's core capital was $2.98 billion, or almost 10%, below the required minimum.