Scary Times

Just how bad is the Fannie/Freddie situation? Back in July, according to a CNN.com article, Ben Bernanke assured us that these two GSEs were just fine:

U.S. Federal Reserve Chairman Ben Bernanke told the U.S. Congress on Wednesday that troubled mortgage giants Fannie Mae and Freddie Mac are in "no danger of failing."

The two mortgage giants are "adequately capitalized," Bernanke said. However, "weakness of market confidence is having an effect" on the companies, making it difficult for them to raise capital.

How could he have been so wrong just a few months ago? Did he know and was just spinning the truth on some misguided hope that this fiasco could be avoided? Or was he that clueless? Either through corruption or incompetence, that does not bode well for the decision making process at the Federal Reserve.

And what of the bafoons running Freddie and Fanny? According to the WSJ, they are facing the humiliation of being removed from their jobs:

Mr. Lockhart appointed a new chief executive officer for each company but said he hopes to keep most other employees in place. At Fannie, Herb Allison, who has served for the past eight years as chairman of the investment company TIAA-CREF, succeeds Daniel Mudd. Freddie's chief executive, Richard Syron, was replaced by David Moffett, who has been vice chairman and chief financial officer of US Bancorp.

It appears Mssrs. Syon and Mr. Mudd (how apropos is that name?) were brought in to clean up the place in 2003. They did a heck of a job, Brownie.

……But then the companies' efforts to disguise the normal fluctuations in their earnings led to regulatory findings that they had violated accounting rules. The scandals flushed out top executives at both firms.

In late 2003, Freddie drafted in as its chairman and CEO Mr. Syron, a former president of the Federal Reserve Bank of Boston and chief executive of the American Stock Exchange. A year later, Fannie gave a battlefield promotion to its chief operating officer, Daniel Mudd, giving its CEO job to the decorated ex-Marine, a son of TV newsman Roger Mudd.

But the humiliation of being booted is somewhat tempered by the obscene amount of money both are carting away:

Mr. Syron may walk away with an exit package that could total as much as $15 million, says David Schmidt, a senior consultant at James F. Reda & Associates LLC, a compensation consulting concern in New York. That includes a pension and deferred compensation, about $3.7 million in severance pay, and a possible payment of $8.8 million to compensate for forfeiting certain equity grants.

Mr. Mudd's exit package, including stock he already owns, could total $14 million, Mr. Schmidt estimates. That includes $5 million in pension and deferred compensation, $4.2 million in severance pay and $3.4 million of restricted stock, based on Friday's closing price. That value of that stock could fall sharply, however.

Of all the blogs, I think Mr. Mortgage’s blog http://mrmortgage.ml-implode.com/ hits the key factors the best. He is clearly outraged at what’s happening, as we all should be.

He points out that Freddie/Fannie’s toxic loans were made due to corruption/incompetence all the way to the top ( his entry 'Enron on Steroids').

He says these loans should not be bailed out by us taxpayers, and in fact at the time they were made, were explicitly not backed by the government. He and another blogger, Karl Denninger, extract the important points to focus on in this mess. Whether anybody is listening is debatable.