"In 2006 and early 2007, the industry, many analysts and market observers were generally not predicting a downturn in the housing and credit markets to the magnitude of what has since emerged, and outlooks for particular market segments at that time varied significantly."

-Fannie Mae chief Daniel H. Mudd


That is the excuse given by Fannie Mae CEO Daniel Mudd as to why the GSE bought into so much ruinous paper (and at the peak of the market to boot).

One would imagine that the people running the biggest purchaser of mortgages in the world would have their own independent expert view, would understand housing, and might be familiar with the real estate cycles in the United States.   

One would be wrong.

I find it amusing that some lying liars argue that the Fannie Mae (FNM) and Freddie Mac (FRE) were "forced" to purchase sketchy mortgages by some government HUD or CRA mandate. As the Washington Post reveals, that turns out to be completely false.
Rather, it was a mad grab for growth that sent Fannie into the arms of
the most risky mortgages.

Fannie was supposed to be buying mortgages and then securitizing them itself. Instead, Fannie Mae thought itself a large hedge fund, and was investing in RMBS and derivatives packaged by others. According to regulatory data, as far back as 2002, Fannie Mae had invested in "tens of billions of dollars of such securities."

The risk reach by Fannie is detailed in a number of the internal Fannie memos that describes this as part of their growth oriented business model:

In January 2007, as years of loose mortgage lending were about to send the nation’s housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board.

Discussing the company’s successes, Mudd said one of Fannie Mae’s achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step "toward optimizing our business."

A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.

Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

One last factor: WaPo adds that during the housing boom years, Fannie was "distracted by an accounting scandal and its fallout. For much of 2006, the company was focused on a continuing effort to correct years of false financial reports, a massive project that cost more than $1 billion and ultimately revealed that Fannie Mae had overstated past profits by $6.3 billion."

I didn’t think companies could overstate REVENUES by more than six billion dollars, and these clowns were overstating profits by that amount. (Why aren’t a lot of people in jail over this?)

There’s more at WaPo…


William Ackman on Fannie & Freddie (July 2008)

Even More Writedowns Coming  (July 2008)


Fannie’s Perilous Pursuit of Subprime Loans
David S. Hilzenrath
Washington Post, August 19, 2008; Page D01

Category: Bailouts, Corporate Management, Credit, Legal, Real Estate, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “His Name is Mudd”

  1. Marcus Aurelius says:

    Why aren’t more people involved in the corporate/governmental crime spree in jail over all of it? The criminality is conducted broadly, brazenly, and in open daylight.

    Criminality has become our culture.

  2. Joe says:

    Must read article, nice post:

    Unfnbelievable, these guys rewarded themselves and their employees with gifts and parties for fixing a major error (errr fraud) that occured previously.

    “Mudd promised his employees a celebration when the restatement was done, and he delivered. In December 2006, the company threw a holiday bash at a Washington hotel with entertainment by Earth, Wind & Fire, the ’70s group known for such hits as “Boogie Wonderland” and “Fantasy.”

    “I hope you had a fantastic time at the holiday party. I sure did. And my feet still hurt. Thank you for making the party a blowout,”

  3. VoiceFromTheWilderness says:

    ‘Distracted’ — good old WaPo. Yes, the poor itty bitty widdle managers of a 5 trillion dollar corporations, were distracted by a ‘scandal’ that just came up out of nowhere, motivated by politcal elements in the opposition corporation (the evil am einnaf) who used scurrilous slurs of corporate mis-management because they hate the freedom of Fanni Mae and loathe their close relationship with the almighty. Yes that’s right folks accounting ‘scandals’ are just ‘distractions’, one of the burdens of corporate management, the cross they have to bear. They are not responsible for these ‘scandals’ and have no recourse, being the fine upstanding citizens of stupendous moral fiber we know them to be, but to dilligently respond to these baseless, and meaningless attacks designed to undermine our faith in freedom, God, and Glory of the American Economy. We call on all loyal american citizens to stand by these titans of industry, these leading lights of liberty, in their moment of tremendous challenge and hardship. Please call 1-800-we-love-u and donate whatever cash you have to help them through their time of need. Or if you have no cash to donate, a pledge of a lifetime subscription to WaPo will be accepted as proof that you are a true and loyal citizen of Corporation USA.

    America — where no one is responsible and everyone gives until it kills em

  4. Marion says:

    The definition of a columnist is a writer who puts the details in context. That’s what the site has allowed you to become, an influential columnist. No one could have made sense of Enron without Floyd Norris even though there were very good reporters on the story.

    The Mudd piece was significant because you pierced that self-serving defensive statement with a stunningly simple but trenchant point. Who cares what anyone else thought at the time? What was their analysis? In the process, you revealed the most damning thing about the GSEs is their ambition. Not content with their license to print money, the GSEs were run by people with ambitions to compete and surpass institutions working without a safety net.

    Unlike the big funds, you showed that Mudd had no secret sauce. He didn’t have strategy or model or data set that distinguished his firm. Whether they succeed of fail, we allow hedge funds because we think creativity and risk balance each other out. But it would appear that Mudd wanted the benefits without doing the creative work or taking the risk. All he had was the cheaper borrowing costs of the guarantee.

    The other nagging issue is what about Fannie Mae encourages this kind of recklessness and fraud. They mention the accounting scandal (wasn’t the problem with Raines that he was doing cookie jar accounting and managing earnings?) and it reminds you that the place seems to have been structured to generate some kind of fraud. Maybe there’s something in the building.

    I’ve gotten off my point. What a great columnist does is raise questions that drive the news cycle. You’re just on the verge of having that kind of influence.

  5. Jeff M. says:

    Barry: Only the “little people” (and the folks from Enron) go to prison. You should know that by now!

  6. GB says:

    Hmmm the Primus song ‘My name is mud’ kind of fits here…

    My name is mud
    Not to be confused with bill or jack or pete or dennis
    My name is mud and its always been
    cause Im the most boring sons-a-bitch youve ever seen
    I dress in blue-yes navy blue
    From head to toe Im rather drab except my patent shoes
    I make em shine, well most the time
    cept today my feet are troddin on by this friend of mine
    Six foort two and rude as hell
    I got to get him in the ground before he starts to smell
    My name is mud

    My name is mud, but call me alowishus devadander abercrombie
    Thats long for mud so Ive been told
    Told that by this sonsabitch that lies before me bloated blue and cold
    Ive got my pride, I drink my wine
    Id drink the finest except I havent earned a dime in several months
    Or were it years
    The breath on that fat bastard could bring any man to tears
    We had our words, a common spat
    So I kissed him upside the cranium with an aluminum baseball bat
    My name is mud

  7. Tom says:

    Who is buying FRE and FNM today? They are either idiots or they have the assurance from Paulson that he will come in with another bail out.

    No sane money manager would be buying these stocks without some hint that there is a way out.

  8. Reality has become bizarro world says:

    I think Attorney General Muskasey succinctly reflected the current regulatory climate—

    “Not every wrong, or even every violation of the law, is a crime,” he said. In any case, the wrongdoers have been punished, he claimed, by “substantial negative publicity.”



  9. leftback says:

    Tom – there are idiots every day who will buy FRE FNM and LEH.

    Interesting discussion this morning with Gary Kaminsky and Bob Doll on CNBC. Kernen was out so Becky Q let them talk and they were very bearish on retail and commercial RE in particular.

  10. Tom says:

    What is the play book here. When Paulson finally realizes his only option is to wipe out the shareholders of FRE and FNM who will benefit from the taxpayer bailing out the bond holders?

    Are the usual characters going to run on the pronouncement that the financial are saved (MER, GS, MS, LEH, etc)?

  11. anonymous coward says:

    Getting interviewed by aging pom-pom girl Mario Bartiromo is only punishment to the viewing public.

  12. Stuart says:

    What utter horsecrap! My cat could see that the path the housing market and the credit markets were one were unsustainable. Many people were accurately, thoughtfully spelling out this as well. For those claiming in one manner or another they couldn’t have known, they are committing the most egregious personal and professional suicide of their character possible. For that alone, they need time behind bars, all of them.

  13. GB says:

    Don’t a lot of foriegners own bonds in these? I heard that’s why Bush administration didn’t let it fail. That who will probably benefit the most.

  14. zackattack says:

    Who’s buying ‘em? I guess people who think this is a 1991 re-run.

    I dunno, maybe at some point – 50 cents or below – I’d almost be compelled to take a swing, using pure risk capital, at one of them as a call option on the notion that someone, somewhere, somehow in this trainwreck eventually does something non-stupid.

    I know it’s a stretch…

  15. liam says:

    primus sucks

  16. philipat says:

    It’s so sad that all this corruption is destroying your country. Russia is saying FO and there is nothing that can be done. The rest of the world is catching up and taking over. Why can’t America get it’s act together? Perhaps all the smart people are just concerned with making money. And look where that got you? The defecits, the entitlements, the negative savings rates etc are destroying your country. What does it take to find some leadership, as opposed to party politicians? America’s problem is instant gratification and it doesn’t save enough. Are there no leaders out there who can stand up and tell the country the facts of life. And that I don’t care if I get re-elected? Does nobody truly care anymore for the future of your country? Where are the solutions?

    Life here on the beach in Bali seems pretty good, long cash, short financials and prepared for the worst.

    But I sure as hell don’t get why such a great country, for which I have tremendous respect and family ties just seems unable to get its act together.

    What gives?

  17. Mike J says:

    Quell the commentary, Barry!

    Mudd’s words and actions remind me of Chuck Prince’s “as long as the music is playing, you’ve got to get up and dance” spiel. How will Mudd make out? Probably like a bandit, just like Prince, O’Neal and Tangelo.

  18. Greg0658 says:

    quote – “According to regulatory data, as far back as 2002, Fannie Mae had invested in “tens of billions of dollars of such securities.”

    Thats All? Outta $2.5 Trillion?
    Minimum margin call folks.

    “Please call 1-800-we-love-u and donate whatever cash you have to help them through their time of need”

    You, me and foreigners ALREADY HAVE.
    In the words of George Bailey “come on your money’s in Joes house”. “Potters not selling – He’s buying”

    and the MSM and CNBC are Potters henchmen

    There is trouble in many the bank books. Don’t fall for this … as is!

  19. Jeff M. says:

    Mike J: I think Mudd’s plan is to meet Prince, O’Neil and the Tan Man on the beach somewhere akin to the final scene in “Shawshank Redemption”. Prince will be working on the boat, O’Neil will be body surfing, and Tan Man will be working on his tan when Mudd strolls up with a big grin on his face (and bag of money).

  20. mark mchugh says:

    Here’s how it works:

    The president says we need to inspire confidence in our markets. The need for Justice implies crime, and crime destroys confidence in our markets.

    Any questions?

  21. Greg0658 says:

    Went to a State of a City Address last night. Seems an enterprising individual bought up over 100 acres of land around an interstate exit at $5K an acre and now is offering city option to buy at $22K each (for the plot). All fair in business as usual. I’m sure a tax shelter is in the plan.

  22. Philippe says:


    Agree on the substance and defer on details as I would have written it ?

    Enough with the contradictions in the USA, where they are good universities very good people and sub par politicians unable to read Machiavel without making a cartoon out of it, consuming not only its financial credit but the most important its credence.
    Enough with the cult of money « before alles! » , enough with the self indulgence , and no I am not in Bali and no I do not short financials as they are too slim (à vaincre sans péril on triomphe sans gloire)

    But yes I remember « It is not how you fall but how you stand up « !

  23. Ironman says:

    I didn’t think companies could overstate REVENUES by more than six billion dollars, and these clowns were overstating profits by that amount. (Why aren’t a lot of people in jail over this?)

    BR: I love it when you come around to my way of thinking! From 11 July 2008:

    Some people are discussing these financial issues as if they were a random black swan event. But that’s incorrect; these events are the result of a long series of missteps in central banking, government actions, corporate errors, and risk mismanagement

    I think you’ve described the situation exactly right. Both Fannie Mae and Freddie Mac went out of their way to staff their executive suites with people with government and political connections rather than people who knew the business well – a pretty clear indication that they thought those kinds of connections that can influence how regulations get set and enforced mattered more than running a viable business.

    The truth is that doing so paid off for a while, so successfully that they thought the rules they had rewritten at their direction would protect them from the risk of backing loans of ever worsening quality. And now, they’re using the same connections to try to get out of the hole they dug for themselves.

    I can’t say whether either GSE is too big to fail, and should be bailed out by the federal government. But I do think that a reasonable trade to make in return for the government bailing one or both of them out is for those most politically connected in the executive suites of Fannie Mae or Freddie Mac to serve some quality time in a different kind of federal institution.

  24. Andy Tabbo says:

    Good thing that monkey Chris Cox & Co. made all that evil-doing shorting more difficult. Now we get to observe stocks plummet straight to ZERO and not stop or bounce because of short covering.



  25. ELS says:

    We hear a lot about Freddie and Fannie, but what about Ginnie? She couldn’t be the prudent wallflower at dance, could she?

  26. leftback says:

    Tom said:

    “What is the play book here. When Paulson finally realizes his only option is to wipe out the shareholders of FRE and FNM who will benefit from the taxpayer bailing out the bond holders?

    Are the usual characters going to run on the pronouncement that the financial are saved (MER, GS, MS, LEH, etc)?”

    Yes. The playbook here says sit tight, hold lots of cash, wait for the inevitable bounce/short squeeze to develop and then get short the financials again. Repeat until September.

  27. MarkTX says:

    Why aren’t more people involved in the corporate/governmental crime spree in jail over all of it? The criminality is conducted broadly, brazenly, and in open daylight.

    Criminality has become our culture.

    Posted by: Marcus Aurelius | Aug 20, 2008 9:12:29 AM

    Bravo and exact…

    Loud Golf Clap to you sir…

  28. winslow says:

    The current administration is not interested in pursuing criminal activities in the corporate world. Back when the Enron fiasco was occurring, all stops should have been pulled out to prosecute any type of fraud in business. How can any Republican have a good conscience after all of this? How can any legitimate business operate successfully against these odds?

  29. BB says:

    Bernie Ebbers – 25 years in prison.
    Harold Raines – Not even a trial.
    And whose fraud was larger? Not WCOM!
    And Raines and Co. manipulated earnings to increase bonuses and line their pockets.

    Not even a trial…He should be in jail.

  30. simon says:

    I remember hearing about how F & F were acquiring all these MBS’s back in when?? Jan Feb March??. I remember thinking how nice for the Hedge Funds broker dealer’s etc stuck with all that sub-prime rubbish on their books.

    The rational was that it was their job to buy it and how nice it was to have a simple situation were all the problems were in one place. I think it was clear even at that time that ultimately the tax payer would be liable for the bad debts.

    I would not be surprised if looking back this event turns out to be the defining point of the ten’s or naughts, or whatever you want to call this decade.

  31. DeDude says:

    This is why F&F should never have been allowed to become shareholder owned. In the private sector there is always this desperate reach for more profit and the associated higher bonuses. Free market forces is the slightly less ugly sister of greed and selfishness, and the results of letting F&F be shareholder owned were predictable. Their leadership abandoned its responsibility to the public, in pursuit of more money for themselves.

    No matter what we do, the people of this country are going to pay bigtime for this. It may come in form of loss of home values, or higher interest rates for home loans, or serious losses in pensionfunds, or a deep ressession, or direct government bailouts, or all of the above. Lets hope the voters learn their lesson and stop electing people who don’t believe in government to run their government.

    F&F is a great idea if it is done right and shielded from the greed and shortsightetness of private market forces. They should be non-profit and government owned so the implicit guarantee of their bonds becomes explicit. They should by law, only be allowed to purchase mortgages, and only those that live up to a very stringent set of criteria (basically the 80% LTV and documented income criteria of the old days). This would allow homeownership at a low interest rate to those that can afford it – a win-win for everybody except the leaches that hate it when government prevent them from sucking on other people. However there will be pleanty of money left for the leaches to make on loans for the remaining 20% of the price (to those people who don’t believe in delayed gratification) and to people who cannot afford the house they want to purchase. But that part of the market should never be guaranteed, backstopped, subsidized, helped, bailed out, or taken over by the government. If they want the profit they must take the risk and its consequences.

  32. zackattack says:

    Tom said:

    “What is the play book here. When Paulson finally realizes his only option is to wipe out the shareholders of FRE and FNM who will benefit from the taxpayer bailing out the bond holders?”

    Been thinking about this a little bit today.

    There are a bazillion ways to be short, of course.

    My best long idea is NLY. They borrow at margin rates to buy GSE paper.

  33. me says:

    “Why aren’t more people involved in the corporate/governmental crime spree in jail over all of it? ”

    We are all big business republicans.

  34. 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…