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FIREBELL IN THE NIGHT:
Freddie Mac shares fall further as executives replaced
One executive fired, two quit; accounting practices cited
“WASHINGTON (6/9/2003, CBS
Market Watch) -- Home-mortgage purchaser Freddie Mac abruptly fired
a top executive Monday, and two others resigned after its board
discovered that the organisation had underreported profits from
2000-2002.
“Shares of McLean,
Virginia-based Freddie Mac (FRE) slumped back toward their session
low, shedding $10.22, or 17%, to $49.65 in afternoon dealings.
Earlier, they sank as low as $48.20 before recovering some ground.
“The company forced Leland
Brendsel, chairman and chief executive, to resign. Brendsel has
been replaced by Gregory Parseghian, Freddie Mac's chief investment
officer. "We decided that it was in the best interest of Freddie
Mac to move forward with new leadership," Brendsel said in a
statement. Vaughn Clarke also resigned from his post of chief
financial officer, and David Glenn was terminated as chief operating
officer. Glenn was fired "because of serious questions as to the
timeliness and completeness of his co-operation and candour with the
Board’s Audit Committee counsel," Freddie Mac said.
“During the period in
question, Freddie Mac earned more than it reported, and had a higher
capital surplus. The practice, called "smoothing," allows
companies to meet financial targets and show sustained earnings
growth. The company said prior financial results would be restated
to reflect the correct information. Excess profits of the past few
years are expected to be offset "in future periods," Freddie Mac
said.
A spokesman for Rep. Richard
Baker, R-La., said the congressman -- a frequent critic of the
company and other so-called government-sponsored enterprises --
remains concerned about the accounting and reporting practices at
Freddie Mac. "If there has been fraud, we will ferret it out and
find the guilty parties," Baker said. "But if there are further
problems with Freddie's management practices and controls, we must
address them as well." [End of quotation from CBS Market Watch]
TRANSLATION
Freddie Mac and Fannie Mae (FNM)
combined control 42% (more than two-fifths) of the US mortgage
market. The federal government created these so-called “Government
Sponsored Enterprises” (GSEs) precisely to pump up mortgage
availability. The law does not force GSEs to register with the SEC
like every other corporation, and exempts them from securities law.
GSEs “bundle” mortgages and with those mortgages as backing, issue
“agency paper” (“securitise mortgages” into bonds). In plain
English, this is a scheme to monetise real estate. Its
purpose is pure inflation to buy poor people’s votes.
Through Fannie Mae & Freddie
Mac the government has pummelled down payments to zero (yes,
nothing) and made mortgages available to what sane lenders would
forever consider ineligible borrowers. This is the aim of the game,
not a good aim gone bad.
Through Fannie Mae & Freddie
Mac Greenspan has managed to create a real-estate bubble to follow
the stock market bubble his inflation created beforehand. By
lowering interest rates Greenspan has managed to keep the bubble
economy afloat, at least in real-estate. New money and new debt
that once flowed into stock markets shifted directions and flowed
into real estate. Fannie Mae & Freddie Mac are the heart of this
scheme, pumping inflationary debt through the fevered economy.
What happens when the
heart stops?
Every bubble ends with some
prick. Often, at the time the “Prick!” seems inconsequential, just
one more unremarkable news event. More often than not, the prick is
a revelation of fraud or corruption at the heart of the bubble.
Lo, I am not prophet enough
to say that this Freddie Mac problem will indeed prick the
real estate bubble, but it surely could. You ought to view
every development in this case with wary eyes of ice-cold
suspicion. Watch the prices of Freddie Mac & Fannie Mae as proxies
for the entire real estate bubble.
From long ago I have warned
that real estate is in a bubble, the burst whereof will cover
everyone with slime. Millions will be lost and ancient shibboleths
of investing (“Residential real estate hasn’t gone down since World
War II”) will be revealed for folly. Real estate prices will suffer
the same punishment bubble prices always suffer, that is to say,
they will drop by 50% to 95% (lose half to 19/20 of their peak
values). Losses there will sap economic activity everywhere for
many years. Instability in Freddie Mac & Fannie Mae paper will sap
the US dollar as it sends foreign investors fleeing from agency
paper and the dollar.
Sit down now and determine
how much your present investments are exposed to the real estate
bubble. That includes examining the cash flow of commercial real
estate and your position in your own home. Take whatever steps are
necessary, right now, to protect yourself from exposure to the real
estate bubble – whatever steps are necessary. – F. Sanders
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