Susan Wharton Gates, a former Freddie Mac employee, recently published a book delving into the collapse of that housing finance enterprise. In my review, I write,
The fall of Freddie Mac came as a shock to those of us who were there in the late 1980s and 1990s, who refer to ourselves as “old Freddie.” Was the tree that seemed so sturdy twenty-five years ago knocked down by a storm or did it rot from within? Gates says that it was both. She tells the story of Freddie Mac’s fall as a combination of both external pressure and internal rot.
My review essay is long and personal. You might see at as an exercise in therapeutic reminiscence.
At that time, interstate banking was not allowed, so the S&L industry was segmented geographically, with no way to shift savings from the East Coast to the West.
A similar argument was, if I remember Liar’s Poker correctly, later used by Sal Ranieri at Solomon Brothers in the 1980’s to get Congress to pass a law making it easier for mortgages to be traded as securities: that with the shift in population from Rustbelt to Sunbelt, there weren’t enough funds available from local banks in places like Florida, Georgia, Texas, etc, for everyone one that wanted a mortgage or for construction companies to build new homes.
I never understood that argument. Can’t the local banks just issue bonds to raise funds? Is it a capital requirements thing again?
To comment on the hedge accounting footnote: your description is not off base – cash flow hedges allow the deferral of gains and losses on the derivative until the forecasted transaction (wheat sale) affects earnings.
However, on the larger point on the related accounting irregularities, based on a cursory google search, it appears hedge accounting was disallowed by the new auditor due to either an insufficiency of documentation relating to the hedging program or just overall misapplication (or both). There is a significant amount of documentation that is required in order to implement and maintain hedging programs – this leaves two likely explanations, (1) Freddie did not prepare the necessary documentation to implement hedge accounting or (2) just used “hedge accounting” as a guise to manage the timing of recognizing derivative gains and losses in earnings without actually applying GAAP hedge accounting. The way this section is written it appears that Freddie was the victim of the arbitrary power of the new auditor who “did not approve” of hedge accounting. This doesn’t ring true — auditors can be arbitrary but not to the degree implied.
Thanks for that review, a very good read. Reminds me a lot of what I’ve experienced in my own career.
“… does not come from elected officials or regulators but from believing in something bigger than ourselves, something more moral than our hearts, an unseen judge of action and inaction who someday will call things into account. Only something like the old-fashioned fear of God has the power to induce people to do the right thing… (Page 253)”
I came to a similar conclusion in my darkest hour and its why I turned to the church.
The hardest part down the line is realizing that as a day to day matter, “do the right thing,” is very hard to operationalize. I don’t mean in the “stiff upper lip way.” That is key and does come down to choice. I mean in the “what’s the right thing” way. I’ve encountered a few of these cases just recently and it eats away at you when you can’t do anything about what seems like a fated outcome.
It’s so much easier in the sub-Dunbar world. Past that the casual load just starts to overwhelm. In my materialist moods I don’t believe man’s nature can handle this level of complexity. Maybe man’s not divinely designed, maybe man has an inevitable failure mode. What do you even do with that if its true? If you deny it, where does that leave you in terms of practical action anyway? Most people I know who deny it just come up with some lie about the world to believe with disastrous real world consequences. Not very heartening.