Why did Fannie Mae and Freddie Mac end up under governmental control?
I believed that the two mortgage giants would weather this financial storm. As the gust of fears blew their stock prices down, and I worried over the amount of capital that they had decreasing, but I relied on the reports which indicated that they had the reserves to meet any of their needs. I had not expected the winds to batter sound houses, but as revelations of their accounting practices come to light, I find that the houses were not built so soundly.
The news today is that Mr. Lockhart will announce the new receivership status of these institutions. I had not heard of the new accounting irregularities; I thought that concerns expressed where based upon older practices, which were said to be corrected. Although it seems no accounting rules were broken, they were bent. The reserves were not there. The firms could not have met growing problems.
Although it seems many corporations complain about Sarbannes-Oxley, I think we might need even further standards to define what is appropriate if it can cause the consumer harm because of the action of such large firms. I thought that these two mortgage giants would have been more cautious, but this appears not to be the case. If investors cannot have confidence in their acquisitions, our market cannot move forward. As an investor, it bothers me that I cannot trust that my interests as an owner is not as important as the interest of the CEO. I feel that too many of us are looking at the short term results instead of long term gains.
In times of crisis, we easily accept measures which would prevent such issues from arising again, but we do not want to go to an extreme. Acceptable accounting standards seem reasonable to me. Letting people understand how financial figures are arrived at is the simplest start. If you tell me that you have $5, then I trust that you have that money. However, if you owe ten dollars to someone else, then you are in debt for $5. If that information is kept from me, there is no way for me to understand your financial situation. This is what occurred with Fannie and Freddie. They kept their debts hidden, so their money in hand was not really there. I realize that stating how a number was arrived at is easier said than done, but it really should not be so difficult, and it may cause firms to be more honest in their affairs.