Until now, Fannie Mae (FNM) has taken the same stance toward its collapse that most Wall Street firms have: We were hit by an unforeseeable hundred-year perfect storm, and we’ve done a darn good job managing through it.
The leverage on Fannie’s balance sheet made Bear Stearns look safe. By some estimates (including off balance sheet behaviour), the company bet more than $80 for every $1 it had. When you’re carrying this kind of leverage, it’s easy to look like a hero when asset prices are going up. When they start going down, however…
The idea that the housing crash was impossible to foresee, moreover, is a modern one–created after the crash to allow executives at companies like Fannie to feel better about themselves. Many smart analysts were screaming from the rooftops for years that the housing bubble was a disaster in the making. Like many real-estate buyers and mortgage lenders, however, Fannie’s management just chose to ignore them.
If you catch yourself feeling sorry for Dan Mudd and the other Fannie execs, don’t forget that minimum capital ratios are just that: minimums. The government doesn’t require you to bet the firm. Fannie ‘s senior managers chose to bet the firm. And like the managers at Bear Stearns, they lost.
And now, finally, after its stock has dropped from $70 to $6 and the government has been forced to step in to save it at taxpayer expense (verbally, so far), Fannie is at last acknowledging some incompetence. Not directly, of course–the public explanation will always be the unforseeable perfect storm–but indirectly: the company’s CFO, chief risk officer, and chief “business” officer (?) have been fired.
Lord knows what Robert Levin, the chief business officer did, but whatever it was it didn’t help. What CFO Stephen Swad and chief risk officer Enrico Dallavecchia did, meanwhile, is clear: drove the company into an iceberg.
The firings are designed, in part, to protect the job and reputation of CEO Dan Mudd, who the board now says it has full confidence in. It shouldn’t. Mudd was in command when Fannie made the decisions that killed it, and, ultimately, it’s his fault the ship is going down.
It would be nice to think that Mudd’s waver is only temporary, that the board just wants to keep him until the situation stabilizes and then finish putting the blame where it belongs. But the truth, most likely, is that Mudd persuaded the board that he wasn’t responsible, that someone else deserved to take the fall. This tactic is used frequently by CEOs who blow it (see Lehman CEO Dick Fuld). It works for a while–and sometimes forever. But in Fannie’s case, the problems are intractable enough that there will likely be another wave of firings to come. And that one, we suspect, should and will claim Dan Mudd.
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