Friday, February 13, 2009

Imagine Pandit Querying Barney Frank: Caroline Baum 2009-02-12 19:23:05.574 GMT

Commentary by Caroline BaumFeb. 12 (Bloomberg)

-- The chief executive officers of WallStreet’s too-big-to-fail banks traipsed up to Capitol Hillyesterday to submit to questioning from Barney Frank and theHouse Financial Services Committee he heads.

It was the latest installment in a series of show trialsfeaturing the likes of Major League baseball, the Detroit autoindustry, Big Oil and Bad Tobacco.

Not that Congress is outside its jurisdiction in inquiringafter the taxpayer money it has doled out. (If only lawmakerswere as vigilant about the rest of their spending.)

When our elected representatives are out for blood, a legitimate form of inquiry quickly degenerates into finger-pointing and grand-standing for the folks back home.Yesterday’s hearing was relatively tame, as far as lynchings go.

The eight Wall Street CEOs, including Citigroup Inc.’s VikramPandit, JPMorgan Chase & Co.’s Jamie Dimon, and Bank of AmericaCorp.’s Ken Lewis were questioned about their lending, or lack ofit, since they received an injection of government capital underthe Troubled Asset Relief Program. They were scolded for spendingthe money unwisely. They were asked about salary, bonuses and“planes and perks” (a show of hands, please).The bankers were appropriately contrite in admittingmistakes and sincere in their commitment to make amends.

Panditvolunteered to take a salary of $1 and no bonus until Citigroupis profitable again.

The execs had to dance around some of the questions, such as one on raising credit-card rates, with prosecutor Maxine Waters,Democrat of California, cutting off the witness before he could explain how banks make a profit.

Reversal of Fortune

Just imagine if the tables were reversed.

Frank and Watersare seated at the witness table instead of perched on the hearingroom dais.

The questioning would go something like this:

Chairman Frank, on July 14, 2008, you made the followingpronouncements about Fannie Mae and Freddie Mac, the two hugegovernment-sponsored enterprises that are the key players inmortgage finance:

“Fannie and Freddie are fundamentally sound.”
“They are not in danger of going under.”
“Looking at the financials, they’re solid.”

You followed that analysis with a forecast.

Referring tolegislation before your committee to allow the Treasury to lend to and buy unlimited shares in the GSEs, you said:

“We’re doingthree separate things that make it much less likely -- very, veryunlikely -- that we’ll have this kind of a housing crisis sixmonths or a year from now.”

Less than two months later, Fannie and Freddie were wards ofthe state.

Just answer the questions, Mr. Chairman.

GSE Enabler

As the ranking member of the House Financial ServicesCommittee -- before you became chairman in 2007 -- you consistently opposed stricter regulation of Fannie Mae andFreddie Mac.

I would just note that you received $42,350 fromFannie’s and Freddie’s political action committees and employees from 1989 to 2008.
In 2004, you received a report from the GSE regulator showing that Fannie and Freddie had manipulated their earnings, enriching their senior executives in the process.
Yet you and your fellowcommittee members, primarily Democrats, looked the other way.
Even worse, you shot the messenger, Armando Falcon, directorof the Office of Federal Housing Enterprise Oversight, who foundaccounting irregularities at both companies.

‘Innovation’ Lending

This is what you said to Falcon at a committee hearing:
“I don’t see anything in your report that raises safenessand soundness problems.”

Your distinguished colleague, Maxine Waters, was right thereto back you up.
“We do not have a crisis at Freddie Mac, and particularlyat Fannie Mae, under the outstanding leadership of FranklinRaines,” she said.
She went on.“What we need to do today is to focus on the regulator, andthis must be done in a manner so as not to impede their affordable housing mission.”
That mission, as you noted, has seen “innovation flourish from desk-top underwriting to 100 percent loans.”

We all know how that worked out.
Fannie had to restate earnings back to 2001, erasing $6.3 billion in previouslyreported profits.

Doing Penance

Former CEO Franklin Raines kept the lion’s share of the $91million bounty he received for his six years of service at thecompany. (Raines had to cough up $24.7 million last year to settle a claim that he inflated earnings.)

Questioned by former congressman Chris Shays, Republican of Connecticut, about Fannie’s teensy 3 percent capital cushion,Raines said of the multi- and single-family loans the companyholds:

“These assets are so riskless that capital for holdingthem should be under 2 percent.”

Finally, Mr. Chairman, you used your influence as chairman of the House Financial Services Committee to secure $12 millionfor a troubled home-state bank under the TARP program.

Treasuryhad stipulated that the banks be healthy.

It’s disingenuous to be critical of legislation you passed and a program you implemented when you’re the one bending the rules. Mr. Chairman, we thank you for your candor in appearing before us today.

(Caroline Baum, author of “Just What I Said,” is aBloomberg News columnist. The opinions expressed are her own.)
Editors: Steven Gittelson, David Henry
To contact the writer of this column: Caroline Baum in New York at +1-212-617-3369
To contact the editor responsible for this column: James Greiff at +1-212-617-5801 or

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