Not Enough of a Shake up

“Fannie Mae shook up its senior management in a move it said was designed to ‘drive’ the mortgage company’s efforts to conserve capital and contain a surge in costs stemming from defaults by homeowners.” (WSJ “Fannie Names New Officers in Shake-Up” August 28). Given that Fannie’s stock is down 90% from a year ago, this move is akin to the Captain of the Titanic naming a new First Mate two hours after hitting the iceberg.

CEO Daniel Mudd, who has presided over Fannie Mae since the embarrassing accounting scandal that ended Franklin Raines’ tenure in 2004, said that the move to replace CFO Stephen Swad and Chief Business Officer Robert Levin was intended to restore investor confidence in the mortgage giant, as if a shuffle would do that! After logging billions of dollars of losses ($9.4B, to be exact) over the past four quarters, isn’t it interesting that the guy who was in CHARGE still has a job? It makes me hearken back to Merrill Lynch’s Stan O’Neal, who after presiding over Merrill’s decline, at least had the decency to step down.

Shady dealings at the top of Fannie must be a job requirement. When fudging the numbers doesn’t work, just put the political pressure on to ensure that the regulatory environment is lax. (With enough money, your new BFF Barney Frank’s got your back!) With the Feds lying low, you then assume boatloads of risk and if the bet goes bad, “shake up” your staff, but preserve your own precious job.

As Fox Business News’ Elizabeth MacDonald recently put it (check out her excellent blog at http://emac.blogs.foxbusiness.com/):

“The way these two companies [Fannie Mae and Freddie Mac] recklessly built and operated their Ponzi-type business model boggles the mind. Teetering atop their combined $54 billion net worth is a breathtaking pyramid of debt and assets, $5 trillion. That capital amounts to less than 1% of the mortgages they either own or back…Instead of shutting the spigot off, the two bought subprime and Alt-A securitizations through 2007 when the housing bubble burst, picking up the slack for banks when Wall Street shut down its printing press factory cranking out a drunken daisy chain of asset-backed paper. This is beyond impenetrably stupid. It’s obscene.”

And what may be most obscene is that CEO Daniel Mudd still has a job. If or when the government intervenes to bail out Fannie Mae and Freddie Mac, which looks more and more likely with each day, the first order of business should be to remove the CEO’s who knew exactly what was going on and allowed the mess to go on well beyond any reasonable time horizon. If Mr. Mudd truly believes his own words, “As we move through the bottom of this cycle, maintaining capital, managing credit and driving revenues are priorities and we have to organize the staff accordingly,” then he would do more than replace his convenient scapegoats: he would be a man, take responsibility for his actions and step down. At this point, these actions are just not enough of a shake up.