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Paul Kiesel
Paul Kiesel
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Freddie Mac Boss Ignored Foreclosure, Housing Crisis Warnings

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Richard F. Syron, the chief executive of Freddie Mac, rejected internal warnings that, according to the New York Times, “Could have protected the company from some of the financial crises now engulfing it.”

In 2004, Syron received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing “questionable loans” that would eventually threaten its financial health. Freddie Mac insiders, who have chosen to remain anonymous, say that Syron heightened the companies recent problems (due to the housing crisis) by ignoring repeated recommendations. Basically, this problem (housing and foreclosure crisis) could have been made less severe, if the person in charge of Freddie Mac had kept the company’s exposure to bad loans at a minimum, instead of proliferating it acquisitions of the risky loans.

David Andrukonis, the former chief risk officer to the embattled mortgage giant, told Syron in mid-2004 that the company was buying too many bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.” Syron refused to consider the possibilities that Andrukonis portended, contending that his options were limited. He claims several times over that he was almost bullied into buying more loans by Congress and shareholders, however, at the end of the day, he runs the company and knew that complying with both groups would result in the compensation he’s received since 2003: $38 million. Therefore, he chose not to rock a boat that would eventually sink his reputation, the company’s shares and require government/taxpayer involvement, but we now know that, to Syron, all of those negatives were worth $38 million.

Andrukonis was not the only one warning Syron, several other executives at Freddie Mac warned Syron that the firm needed to expand its capital cushion and to slow the firm’s mortgage purchases. Syron accelerated the latter and now look at where the company sits: It’s shares have fallen by more than 60 percent since February, 2008 and the Fed has had to intervene and financially back both Freddie Mac and Fannie Mae, as both companies were added to the housing bill (with a type of “blank check” provision) that was passed by Congress and signed by Bush last week.

“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,” (New York Times, 8/5/08). Meaning, the two companies that own half of the country’s $12 trillion in mortgages could have avoided government intervention.

Syron and Fannie Mae’s chief executive, Daniel H. Mudd, whose company is also facing the same problems as Freddie, defended their choices of buying high risk loans, saying that they did not anticipate that the housing market would decline so quickly (yet they received a bevy of warnings telling them to curb their high risk mortgage purchases). But the more sinister aspect to their defense is that Syron and Mudd, yielding to the pressures of Congress and shareholders, wagered that if things got too bad (housing prices crashed), the government would bail them out.

Andrukonis reiterated Syron’s and Mudd’s foresight of a government bail out (which they foresaw in this instance, but not in predicting that buying bad loans would equal financial turmoil?). “The thinking was that if something really bad happened to the housing market, then the government would need Freddie and Fannie more than ever, and would have to rescue them [. . .] Everybody understood that at some level the company was putting taxpayers at risk.”

Therefore, companies like Freddie and Fannie collect rich profits, while taxpayers are put at risk, and, still, Syron nor Mudd are accountable for their reckless actions, passing the buck to other groups of people. Large Freddie Mac shareholders echo the sentiments of what Janet Tavakoli, a finance industry consultant and observer of both firms, said concerning Syron and Mudd, “The top people should be booted out, and replaced by executives who have the confidence of the markets.”

Syron, in response to all of the criticism he’s recently faced, said, “What I’m working for right now is to save my reputation.” However, it’s fair to say that we can ignore whatever’s left of Syron’s reputation, as he ignored and scoffed at the warnings of the current housing, foreclosure and credit crisis (when presented to him by Andrukonis and others). The myopic business practices of the last four years were employed by none other than the captain of Freddie Mac’s sinking financial ship, and regardless of who enabled those poor decisions, Syron should be the one held accountable.