real estate bubble - Represent Consumers

In the latest betrayal from Freddie Mac, the same clever devils who helped bring us the financial collapse three years ago, there is unfortunately no surprise.

The high rollers who run the company, whose mission is supposed to be to support homeowners, apparently still think it’s a good idea to use our homes as a casino.

That’s the conclusion reached in an investigative report by NPR/Pro Publica, which found that Freddie Mac had placed billion-dollar investment bets that paid off when borrowers couldn’t refinance from high-interest mortgages into more affordable loans.

According to the NPR/Pro Publica report, Freddie Mac increased “these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.”

In effect, Freddie Mac combined high interest mortgages into packages of securities and sold some to speculators, but it kept the ones that would result in the biggest profits so long as the homeowner never refinanced. Freddie Mac stands to lose if its customers refinance and taske advantage of lower rates.

Freddie Mac was betting against homeowners even though taxpayers had bailed out it and its larger sister, Fannie Mae and the government placed the under a conservatorship after the housing bubble burst in 2008 and it faced mounting mortgage losses.

Though Freddie Mac and Fannie Mae are known as government-sponsored entities, they in fact have been private, profit-making entities for four decades.

Congress created Fannie and Freddie as private companies with a public mission – supporting homeownership, by insuring the mortgages issued by commercial lenders. But the companies had government officials sitting on their boards, and got breaks on taxes and recordkeeping requirements.

During the real estate bubble, the two firms adopted all the bad behavior of other big financial institutions – and worse. Authorities found that at Fannie Mae, senior executives cooked the books between 1998 and 2004, making it look like they hit profit targets in order to justify $115 million in bonuses. Three top executives eventually reached a $31.4 million settlement [with govt or private private pre-bailout] – without admitting guilt.

Executives at the Freddie Mac and Fannie Mae spent millions on campaign contributions and lobbying, courting both Democrats and Republicans (including presidential contender Newt Gingrich) in a successful campaign to ward off more stringent regulation and tighter reins on their bookkeeping, all the while taking on greater amounts of risk, establishing close ties with one of the worst offenders in spreading toxic loans, Countrywide Bank. Meanwhile executives at the two firms were paid lavishly, even after the bailout.

Republicans love to blame the GSEs for the financial collapse, labeling them do-gooder agencies who went wrong in pursuing too aggressively an agenda of providing housing to low-income people.

In his excellent autopsy of the financial collapse, “The Great American Stick-up,” Robert Scheer finds merit in much of the conservative critique. He labels the Fannie Mae and Freddie Mac “highly culpable” for causing the financial crisis – but not for the reasons Republicans say. While the GSEs used the rhetoric of helping people, their efforts to boost low-income and middle-class wasn’t their primary mission, or the reason for their downfall.

Fannie and Freddie didn’t go under because they were trying too hard to help people; it was because they were doing everything they could to super-charge their profits, just like the Wall Street firms.

Scheer quotes the testimony of a one-time regulator, Armando Falcon, who faced stiff opposition from Republicans as well as Democrats when he tried to rein in Fannie and Freddie. Falcon testified in April 2010 before the Financial Crisis Inquiry Commission, which investigated the causes of the meltdown. “The firms would not pursue any activity…unless there was a profit to be made,” Falcon said. “Fannie and Freddie invested in subprime and Alt A mortgages in order to increase profits and regain market share. Any impact on meeting affordable housing goals was a by-product of the activity.”

When it comes to the big money, we’re still playing by Wall Street rules.
For example, California pension officials are paying their investment advisors hefty bonuses even though the funds suffered whopping losses in the real estate crash, an investigation by Associated Press found.

The pension fund faces unfunded liabilities of billions of dollars, though there are sharp differences about the exact amount.

While the rest of the state suffers layoffs, cutbacks and furloughs, life is good for the crew at CALPERS. Fifteen employees were paid more than $200,000 – two more than two years earlier. Though the fund lost nearly $60 billion, all the funds investment managers got bonuses of more than $10,000, and several got more than $100,000.
CALPERS’ generosity extended beyond its investment advisers; the agency also gave its public affairs officer nearly $19,000 in bonuses for two straight years, and a human resources executive who got nearly $16,000 for those years.
Officials at CALPERS offer a variety of explanations: they say the bonuses cover 5 years to encourage their advisers to think long term, not short term. As a result, some of the managers’ funds that saw the steepest short-term declines got the largest bonuses. They have to pay the big bonuses despite the losses because they’re contractually obligated. They insist they have to pay the bonuses because if they don’t, their investment advisers will go to work at hedge funds.

Sound familiar? These are the same explanations we got from the big, bailed out banks who insisted that they had to hand over huge bonuses even though had to go on the dole.
CALPERS’ bonus system seems guaranteed to give its investment advisers lavish bonuses. When times are tough, the bonuses are a little less lavish. But none of the investment experts are actually accountable or will lose out for plunging the state’s pension in too deep into an unsustainable real estate bubble.

California’s pension system is hardly alone in making sure that those who manage its money are rewarded handsomely whether they win or lose.

In Massachusetts, the executive director of the state employees pension fund quit earlier this year while the Legislature contemplated a pay cap. Michael Travelgini, was paid a base salary of $322,000. In 2008, even though the fund’s investments lost money, they did better than other states, so he was given a $64,000 bonus.

Travelgini said the state’s investment managers weren’t paid enough. He’s going through the revolving door to work at a hedge fund that does business with the state, though he won’t solicit the state for a year.

These compensation issues are a strong reminder for the rest of us the lingering issues of the bubble culture. The people who run the pension systems seem to have been infected by the culture of Wall Street and forgotten whose money they’re managing. It will take a powerful disinfectant to remind them.

Betrayals and Bailouts

Around The Web: Wall Street Rules