Freddie’s Risk Officer: CEO Ignored Warning Signs

“He said we couldn’t afford to say no to anyone…”

-David A. Andrukonis, Freddie Mac’s former chief risk officer, about Freddie’s CEO, Richard F. Syron

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A quick excerpt from today’s must read article:

"The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others.

That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing questionable loans that threatened its financial health.

Today, Freddie Mac and the nation’s other major mortgage finance company, Fannie Mae, are in such perilous condition that the federal government has readied a taxpayer-financed bailout that could cost billions. Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Mr. Syron heightened those perils by ignoring repeated recommendations.

In an interview, Freddie Mac’s former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.”

Mr. Syron received a memo stating that the firm’s underwriting
standards were becoming shoddier and that the company was becoming
exposed to losses, according to Mr. Andrukonis and two others familiar
with the document."

Astonishing . . . but here is  the money quote:

"Mr. Andrukonis was not the only cautionary voice at Freddie Mac at
the time. According to many executives, Mr. Syron was also warned that
the firm needed to expand its capital cushion, but instead that safety
net shrank. Mr. Syron was told to slow the firm’s mortgage purchases.
Instead, they accelerated.

Those and other choices initially paid off for Mr. Syron, who has collected more than $38 million in compensation since 2003. But when housing prices began declining in 2006, choices at Freddie
Mac and Fannie Mae proved disastrous. Stock prices at both companies
have fallen by more than 60 percent since February, destroying more
than $80 billion of shareholder value.

More than two dozen current and former high-ranking executives at
Freddie Mac, analysts, shareholders and regulators said in interviews
that Mr. Syron had ignored recommendations that could have helped avoid
the current crisis."

This was simply greed on the part of an executive, a transference of wealth from  Shareholders to himself . . .

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Related:
Ruminations on Moral Hazard   
naked capitalism, August 5, 2008
http://www.nakedcapitalism.com/2008/08/ruminations-on-moral-hazard.html

Previously:
Poole: Fannie, Freddie `Insolvent’ After Losses (July 2008)
http://bigpicture.typepad.com/comments/2008/07/poole-fannie-fr.html

FREDDIE MAC: Spending as if they had a good year (December 2007)
http://bigpicture.typepad.com/comments/2007/12/freddie-mac-spe.html

Fannie Mae Looks Like Hell (November 2007)
http://bigpicture.typepad.com/comments/2007/11/fannie-mae-look.html

Source:
At Freddie Mac, Chief Discarded Warning Signs
CHARLES DUHIGG
NYT,  August 5, 2008
http://www.nytimes.com/2008/08/05/business/05freddie.html

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What's been said:

Discussions found on the web:
  1. lala commented on Aug 5

    Just a reminder – the ceo of Freddie made $20 million last year.
    So after he ignored his risk officier, and made some horrible bets (basically made freddie insolvent), he walks with millions of dollars. Now the taxpayer is going to bail hime out.
    Isn’t this the defination of Moral Hazard?

  2. Andrew Foland commented on Aug 5

    So employees warned Syron in writing about what he was doing. Writing an email to the CEO saying he’s wrong is an extreme measure to protect yourself when something truly bad is going to come down the pike. Simply telling the CEO he’s wrong is one thing, but to put it in email is a deliberate “I’m making sure nobody, including the Board, the SEC, or the FBI, can ever come after me for this” act.

    The problem is: what’s the point of placing blame, if nothing will happen to Syron?

    I bet he won’t even have to give bonuses back.

  3. scorpio commented on Aug 5

    “we cant say no to anyone” — substitute Bernanke for Syron

  4. Walker commented on Aug 5

    Note that Andrukonis is the “former” chief risk officer.

    No good deed goes unpunished.

  5. larster commented on Aug 5

    Calculated risk has a different take on this article.

    ~~~

    BR:

    Link? Excerpt? ANYTHING?

  6. Jeff commented on Aug 5

    A corporate CEO ignoring his/her underlings in the name of padding earnings and as a result his/her compensation package? What a shocker. I’m SHOCKED, SHOCKED that this goes on……

  7. Chief Tomahawk commented on Aug 5

    Richard F. Syron

    A pillar of integrity….

    I hope he’s worked for free ever since he got the internal warnings and decided “to go along…”

  8. Joe Klein’s conscience commented on Aug 5

    Larster:
    I don’t know if it is different so much as CR wants more meat to the reporting given Syron’s background(Once part of the FOMC among other things) and who the anon sources really are.

  9. GB commented on Aug 5

    These guys wouldn’t last a year in China

  10. Bob A commented on Aug 5

    The problem stems from an over-reliance on systems that pay employees based only on short term results without regard to long term consequences. From top to bottom.

    There is no one minding the store. And this allows a select few to periodically raid the treasury.

  11. shrek commented on Aug 5

    Im willing to bet anyone 100 bucks eventually this guy goes to jail.

  12. crock commented on Aug 5

    Former Fed president Poole: NY times oped 07/27
    Fannie Mae and Freddie Mac are not essential to the mortgage market; if they were put out of business in an orderly fashion over 5 to 10 years, the market would pick up the business they abandon. Fannie and Freddie exist to provide guarantees for mortgage-backed securities trading in the market. The business is simply insurance….

    “In fact, there has already been a test case for how the mortgage market would function without Fannie and Freddie. After an accounting scandal in 2005, regulators severely constrained their activities. The nation’s total residential mortgage debt outstanding rose by $1.176 trillion in that year, even though Fannie’s and Freddie’s stakes rose by only $169 billion, just 14.4 percent of the total. In essence, the market barely noticed that the two agencies’ private competitors were providing 85 percent of the increase in mortgage debt in 2005.”

    Now for reality

    The private competitors of Fannie and Freddie, during 2004-2006, i.e. when Fannie/Freddie were crimped – ran a huge racket. There was a collapse in mortgage underwriting standards. They gave mortgages to lots of truly unqualified borrowers.

    This shady environment, along with the exponential growth of structured financial products, SIVs and other off-balance sheet gimmicks that was enabled by the openly corrupt misrepresentation of risk by banks, IBs and the large financial services firms who peddled these toxic junk to naive investors, has brought us into the current financial doomsday scenario.

    GSE’s indeed If anything, the shift away from the GSE’s to the private markets led to the bubble in the real estate markets. The GSE’s just got caught up in that bubble bursting.

  13. Eric commented on Aug 5

    And there will be a buzz about it for a while. And there may be hearings about it. And there may be scathing editorials about it. And over time it will fade. And nothing will be done. And executive positions that could be filled by qualified people willing to work for a few hundred thousand will instead continue to see pay levels in the tens of millions. And the Dick Cheneys of the world will continue to call it “capitalism”. And the financial media won’t really pursue it because they know where their bread is buttered.

  14. s commented on Aug 5

    Exactly how is this any different from Enron – other than this will cost a multiple of the value destruction there.

  15. threetorches commented on Aug 5

    It is easy to blame Syron now, in hindsight, and to portray him as an aggressive risk-taker.

    How soon we forget! Fannie and Freddie had a Congressional mandate to operate in these areas. It was government policy, acting through a quasi-government-guaranteed-yet-nominally-private entity, which set the goals and defined the mission.

    Don’t want to make large loans to debt-burdened marginal consumers? Tough. That was the gig, back then, and Congress made sure of it.

    ~~~

    BR: FOMC member Bill Poole warned Greenspan in the late 90’s and early 2000s that FNM/FRE were a disaster — it had nothing to do with this red herring.

    And, fellow member Edward Gramlich warned about subprime lending around the same time.

    Remember, FNM CANNOT BUY SUBPRIME!!!

  16. Stuart commented on Aug 5

    Unfortunately, I think we’re in an environment where nobody cares anymore. We all strongly suspect greed and collusion at the highest levels, whether they be “wink wink” type of FRE and FNM guarantees to foreign central banks or even amongst financial industry leadership and the political elite. The SECs continued short squeeze is nothing short of blatant intervention putting the banks up on a pedestal above all other companies. IBM execs are 2nd class citizens compared to Countrywide financial execs. Good move COX. Have to protect their kind.

  17. Tom C commented on Aug 5

    Threetorches- Easy money, frothy residential real estate, poltical pressure. The GSE’s hit the trifecta! The moral hazard aspect of all this crap is something the vote buying, ‘political hack’ geniuses in DC hope we all overlook as the ‘guarantees’ pile up. Politics and access to OPM through coercion is the grandaddy of moral hazard.

  18. quietpc3400 commented on Aug 5

    Calcluated Risk – Tanta thinks the NYT article is basically a hatchet job by various the various FRE/Syron naysayers with an axe to grind, either against the exec and/or the GSE’s in general.

    http://calculatedrisk.blogspot.com/2008/08/nyt-hit-job-on-freddie-mac.html

    I tend to agree with Krugman’s writing on the subject, ie. although GSE’s were far from innocent, the vast majority of the damage from the housing bust was caused by the bubble created by aggressively stupid lending by banks and other intermediaries handing off risk via dubiously AAA-rated securities. Subsequent whackage (thanks BR what a great phrase!) after the bubble popped has destabilized the financial system, among them the insufficiently capitalized GSE’s.

    The GSE’s are now being setup as whipping boys for the housing crash, and while there’s plenty to hold their execs to account for, causing the bubble and crash should not be laid at their door.

  19. Joe commented on Aug 5

    Well Greenspan said housing had bottomed 2 years ago, if that genuis can’t get it right, who stands a chance?

    October 2006:

    “I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out,” Greenspan said at an event in Calgary, Canada,

    http://www.msnbc.msn.com/id/15198805/

  20. yojen commented on Aug 5

    I’m sorry, but this whole thing sounds like a pump and dump or the Thrift Debacle, v.2. Re-read Tanta’s piece, where she identifies that Syron was with the Fed, Treasury, and restructuring failed FSLIC banks the last time around. In other words, he has a full rolodex and knows the drill. Qui bono? He was paid more than $38 million to look away while a GSE that is de facto publicly insured took on bad debt at an astonishing rate, despite numerous warnings. Who wins? Who loses? Follow the money.

  21. derringdo commented on Aug 5

    He was paid more than $38 million to look away while a GSE that is de facto publicly insured took on bad debt at an astonishing rate, despite numerous warnings.

    Yeah, right. GSE’s took on bad debt at astonishing rates.

    As someone posted above, almost all of the bad debt was created when the GSE’s were practically out of the market – when their share was down to 15%.

    Don’t let the facts – 85% of the bad debt was created by those free-market loving, private corporations which can do no evil – get in the way.

  22. Howard commented on Aug 5

    Having been there and done that, you cannot begin to understand the competitive pressure brought to bear by CLIENTS to perform like so-and-so Discount Hedge Fund on the Isle of Sark and if you don’t perform I’m out of here. Never underestimate the pressure from clients. If I’m right I’m toast and if I’m wrong I’m toast so we shrug our shoulders, utter a “what the hell” and do shit we know is totally risky.

  23. Howard commented on Aug 5

    Having been there and done that, you cannot begin to understand the competitive pressure brought to bear by CLIENTS to perform like so-and-so Discount Hedge Fund on the Isle of Sark and if you don’t perform I’m out of here. Never underestimate the pressure from clients. If I’m right I’m toast and if I’m wrong I’m toast so we shrug our shoulders, utter a “what the hell” and do shit we know is totally risky.

  24. Simon commented on Aug 5

    I’m going to place 50c carefully alongside that $100 bet by Shrek. I think the $100 was a bit rash but I”ll go for it.

  25. The Big Picture commented on Sep 6

    Fannie

    Last evening, we asked what are the costs and consequences, as well as the market reaction to, the imminent bailout of Fannie Mae (FNM) and Freddie Mac (FRE). Your responses were inspired and informative. (For a brief history of the GSEs, see this earl…

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