Members of a House watchdog panel verbally whipped four former chief executive officers of Fannie Mae and Freddie Mac Tuesday, plumbing documents to show they ignored warnings that investments in risky home mortgage loans could lead to financial disaster.
“Taking these risks proved tremendously lucrative for the Fannie and Freddie CEO’s,” said Henry A. Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee. “They made over $30 million between 2003 and 2007. But their irresponsible decisions are now costing the taxpayers billions of dollars.”
Yet “nobody takes responsibility for anything,” Rep. Mark Souder, R-Ind., said later at a hearing at which House members got angrier, their voices louder as it progressed.
“You’re not being held accountable,” complained Rep. Christopher Shays, R-Conn.
Mr. Waxman convened the hearing to determine why the two mortgage giants collapsed in September, when the federal government bailed them out with $100 billion each and took them over. He drew on 400,000 documents and e-mails that Fannie and Freddie sent to the committee at its request.
The companies have lost nearly $12 billion so far this year, Mr. Waxman said. Together, they own or guarantee about $11.5 trillion in home loan debt nationwide. They traditionally backed 30-year fixed rate mortgages, among the safest of loans, before standards were lowered.
All four of the former CEO’s sat contritely at a table before the committee members, trying to respond politely as the questioning got more intense, the tone more prosecutorial, the demands for direct answers more insistent.
The scene was reminiscent of the recent appearances before other congressional panels of the current heads of Detroit’s Big Three automakers. Members of Congress wanted to know why they needed $25 billion then $34 billion in taxpayer money to ensure their companies’ survival. A compromise $15 billion proposal since has been made.
Indeed, it has been a season of public humiliation on Capitol Hill for the chiefs of some of the country’s biggest corporate giants.
This time, the political whip was wielded in the dying days of the current Congress against a backdrop of what has been described as the worst U.S. financial crisis since the Great Depression, largely caused by the collapse of a years-long housing bubble.
The bursting bubble resulted in earmarking $700 billion in government money for bailing out financial institutions and worsening a deepening recession that so far has caused a jobless rate of 6.7 percent. The recession has spread worldwide.
The four former CEOs at the witness table today were Fannie’s Franklin Raines and Freddie’s Leland Brandsel, both dismissed several years ago after accounting scandals. The most recent two top executives, who were fired in September after the federal takeovers, were Fannie’s Daniel Mudd and Freddie’s Richard Syron.
“Everyone at this table knew that the train was going to crash,” Mr. Shays said.
But the criticism was bipartisan even though some Democrats have blamed Wall Street, not K Street or Main Street, for the financial meltdown.
“The documents make clear that Fannie Mae and Freddie Mac knew what they were doing,” Mr. Waxman said in his opening statement. “Their own risk managers raised warning after warning about the dangers of investing heavily in the subprime and alternative mortgage market. But these warnings were ignored.”
Subprime mortgage loans are those made to people who have bad credit histories. Alternative loans, which the industry calls Alt-A, are those made without verifying that borrowers earn income, have assets or even a job.
Mr. Mudd said that Fannie decreased its purchases of risky loans between 2004 and 2005 from $34.5 billion to $16.3 billion.
“We did our best,” he said.
Mr. Waxman charged that the CEO’s of both Fannie and Freddie ignored the warnings of their chief risk officers and authorized the risky loans. Instead, in the case of Freddie’s Mr. Syron, the officer, David Andrukonis, was fired. Mr. Syron told the committee that Mr. Andrukonis was dismissed “for a variety of reasons.”
“I speculate that it was about profit,” said Rep. Elijah Cummings, D-Md. “I speculate that it was about greed.”
“You’re all getting paid millions of dollars a year, yet you didnt know anything about it,” Rep. Lynn Westmoreland, R-Ga., told the CEO’s. “I didn’t hear anybody say that you knew something was wrong. Your job was rearranging deck chairs on the Titanic while it was going down and didn’t know it was going down.”
Rep. Carolyn Maloney, D-N.Y., asked Mr. Syron whether, in hindsight, “it would have been better” not to fire Mr. Andrukonis. “Do you regret firing him, buying these risky loans”?
“We thought we made the right decision at the time,” he replied, after being pressed to answer the question directly.
“The CEO’s of Fannie and Freddie made reckless bets that led to the downfall of their companies,” Mr. Waxman said. “Their actions could cost taxpayers hundreds of billions of dollars.”