Wednesday, August 6, 2008

Freddie Mac CEO Ignored Warnings Knowing Government Would Bail Them Out

United States Treasury CheckThis is really not much of a surprise, but now we have official reports from company insiders that the CEO of Freddie Mac, Richard Syron, received and chose to ignore numerous warnings from within the company that Freddie Mac was taking on too much risk. A New York Times article published yesterday shared interviews from several current and former employees at Freddie Mac. They made it clear that Syron preferred to increase profits rather than manage risks. Here is a quote from one of the former employees interviewed in the article:

“'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,' Mr. Andrukonis said. 'Everybody understood that at some level the company was putting taxpayers at risk.'”

Now, of course, Syron says that the company never assumed that the government would step in, but one would expect him to say that, especially under present conditions. The bottom line is that Syron--and, to be fair, other Freddie Mac executives--tried to maximize profits however they could and as a result, enjoyed some nice bonuses. According to the New York Times article, Syron’s share was $38 million. Meanwhile, the company’s market cap has lost around $80 billion and now the company is expected to cut their dividends by around 80 percent after the company reported a loss of $821 million last quarter, according to Bloomberg. The following is a quote taken from the same Bloomberg article:

“'This correction is more severe than what we've seen in the recent past,’ said Christopher Whalen, co-founder of independent research firm Institutional Risk Analytics in Torrance, California. ‘Both Fannie and Freddie are going to be profoundly insolvent by the time we're done with this.’”

Freddie Mac is also in worse shape than Fannie Mae because Syron chose to limit the amount of additional capital the company was to raise to--a much lower amount than Fannie Mae. He also delayed the latest $5.5 billion offering, and now because stock prices have plunged and investors are wary of Freddie Mac, the cost of that debt is likely to skyrocket, according to the New York Times. That being said, Syron still has a job, and now he has an official blank check courtesy of the U.S. government. Makes you feel pretty good as a taxpayer, doesn’t it?

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