Has Hensarling actually led the fight against crony capitalism and the SDIs? Among the first things he did upon becoming chairman of the committee was to arrange a fundraising ski "vacation" at a luxurious resort with elite Wall Street lobbyists that he hit up for money. Instead of being in the trenches of the struggle against the SDIs to recover our Nation from crony capitalism, Hensarling is in the first (luxury) tranche of the cronies of capitalism.
Hensarling is also on record opposing requiring the SDIs to shrink to the point that they no larger pose the problems I've described -- and the problems Hensarling described when excoriating Fannie and Freddie. As the reader has doubtless guessed, Hensarling is a hypocrite.
Hensarling stresses that Fannie and Freddie were accounting control frauds
Hensarling's "spotlight" posted an article on July 18, 2013 that is all about Fannie and Freddie entitled "A Reminder of the Corruption That Helped Birth the Biggest Bailout in History."
"While Fannie and Freddie's role in the financial crisis is widely acknowledged, what some may have forgotten is how rank cronyism, Enron-style accounting and outright financial fraud made these GSEs so powerful and unaccountable that they were able to wreck our economy.
Beginning in the late 1990s, executive pay at Fannie Mae and Freddie Mac became tied almost solely to earnings growth. So in order to trigger maximum bonus payouts for themselves, top management at the firms cooked the books to make it appear the companies were producing enough corporate earnings."
Enron, of course, was an accounting control fraud. Hensarling is correct that Fannie and Freddie were accounting control frauds, but he fails to think through the implications.
Disclosure: I was hired by OFHEO, Fannie's regulator (it is now the FHFA), as an expert witness in the agency's enforcement action against Franklin Raines, Fannie's CEO. My report concluded that Raines was leading an accounting control fraud.
Hensarling is correct that as Fannie and Freddie became fully privatized their CEOs ensured that they adopted lucrative executive compensation plans that optimized the perverse incentives of employees to aid the accounting control frauds that the CEOs were leading.
"When the fraud was finally detected, the Office of Federal Housing Enterprise Oversight (OFHEO) issued a scathing report calling the corporate culture created by the executives "unethical.' The report noted:
"Senior management manipulated accounting; reaped maximum, undeserved bonuses; and prevented the rest of the world from knowing.
The combination of earnings manipulation, mismanagement and unconstrained growth resulted in an estimated $10.6 billion of losses, well over a billion dollars in expenses to fix the problems, and ill-gotten bonuses in the hundreds of millions of dollars.'"
Hensarling's blog went on to emphasize a point we always stress about frauds by elite financial institutions -- their "weapon of choice" is accounting fraud.
"OFHEO issued a separate report detailing numerous examples of improper accounting practices at Freddie Mac and pointed to improper trades designed to mislead investors and trigger big bonuses for top executives. The report noted Freddie Mac executives had an "obsession" with earnings growth that came "at the expense of proper accounting policies and strong accounting controls" (emphasis in original).
The fraud "recipe" for a loan originator (buyer) has four "ingredients." It explains why the lenders' and Fannie and Freddie's fraudulent CEOs operated in the manner they did.
- Grow like crazy
- By making (buying) bad loans at a premium yield while
- Employing extreme leverage, and
- Providing only grossly inadequate allowances for loan and lease losses (ALLL)
The attraction of accounting control fraud to the CEO is that it is a "sure thing" that also greatly reduces the risk of sanction.
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