As explained by Warren Buffett:
QUICK: If you imagine where things will go with Fannie and Freddie, and you think about the regulators, where were the regulators for what was happening, and can something like this be prevented from happening again?
Mr. BUFFETT: Well, it’s really an incredible case study in regulation because something called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch over them. And they were there to evaluate the soundness and the accounting and all of that. Two companies were all they had to regulate. OFHEO has over 200 employees now. They have a budget now that’s $65 million a year, and all they have to do is look at two companies. I mean, you know, I look at more than two companies.
QUICK: Mm-hmm.
Mr. BUFFETT: And they sat there, made reports to the Congress, you can get them on the Internet, every year. And, in fact, they reported to Sarbanes and Oxley every year. And they went–wrote 100 page reports, and they said, ‘We’ve looked at these people and their standards are fine and their directors are fine and everything was fine.’ And then all of a sudden you had two of the greatest accounting misstatements in history. You had all kinds of management malfeasance, and it all came out. And, of course, the classic thing was that after it all came out, OFHEO wrote a 350–340 page report examining what went wrong, and they blamed the management, they blamed the directors, they blamed the audit committee. They didn’t have a word in there about themselves, and they’re the ones that 200 people were going to work every day with just two companies to think about. It just shows the problems of regulation.
QUICK: That sounds like an argument against regulation, though. Is that what you’re saying?
Mr. BUFFETT: It’s an argument explaining–it’s an argument that managing complex financial institutions where the management wants to deceive you can be very, very difficult.
Time to hire Canfield & Associates, Inc. to oversee Fannie Mae and Freddie Mac.
http://gsereport.com/
(Taxpayers v. Fannie Mae May 1999)
To prevent another Savings and Loan debacle, Congress established the Office of Housing Enterprise Oversight (OFHEO) within HUD in 1992. OFHEO’s mission is to minimize the chances that two shareholder-owned corporations that are backed by the federal government, Fannie Mae or Freddie Mac, default on their debts, forcing the taxpayers to make up any shortfalls. Back then, OFHEO records show that these two government-sponsored enterprises (GSEs) together had $194 billion in debts outstanding. By the end of 1998, their debts had exploded to $747 billion. Risks to the taxpayers have risen accordingly. At the rate Fannie Mae and Freddie Mac are borrowing, their outstanding debts will exceed the national debt in the next decade. Only OFHEO’s
independent judgment stands between taxpayers and a staggering GSE debt burden that falls on the public if the GSEs miscalculate their risk.
Recently, Fannie Mae took the unusual step of criticizing OFHEO’s proposed agency rule, even before it was published. By law, federal employees must keep their internal discussions over proposed rules secret, raising the question of how the company knew enough to try to preempt what it considered to be “unfair” proposed “risk based
capital standards.” The efforts of corporations to bend regulators to their will is not a new story. However, in a surprising slight of its regulator, Fannie Mae began attacking OFHEO’s capital rule even before it was made public.