The WSJ reported yesterday that Johnson had (secretly) received more than $5 million in *special* mortgage loans from lender Countrywide Financial. There were a few special features about the loans, the main one being below-market rates of interest charged. Having now waded through the details a bit, I see it is a story right out of All the Kings Men. I also see why Johnson was a seriously bad choice to pick for anything. Makes you wonder how naive Obama might be. Here is a brief, 4-part summary for any Robert Penn Warren fans:
Part 1 - The Mortgage Distributor
Countrywide is the largest mortgage "distributor" in the US. As a mortgage distributor, it simply provides mortgage loans to home-owners. Specifically, it lends money to a borrower, say Mary Contrary, and collects the various little fees for "originating" the mortgage (fees paid by Contrary); it then sells the mortgage loan (a stack of paper giving the holder the right to receive 30 years of monthly payments from Mary Contrary) to a third party and uses the money received from the sale to make a new mortgage, collect the fees again, sell that loan, collect the money, and so on.
Part 2 - The Mortgage Buyer
So who is the third party buying these mortgages from Countrywide? Usually it's Fannie Mae (the Federal National Mortgage Association), an entity created by Franklin Roosevelt during the depression to help boost the housing market. Fannie Mae's purpose is to make sure distributors like Countrywide have enough money ("liquidity") to make mortgage loans to prospective house buyers. If Countrywide couldn't sell its loans to Fannie Mae, it could only make one set of loans before it ran out of money and would have to wait 30 years to get all the money back (well, technically maybe like 15). By selling all the loans to Fannie Mae up front, it can keep lending again and again, and the public can always find a loan. If Fannie Mae stopped buying loans from Countrywide, the mortgage market would grind to a halt and the housing market would tank (which is basically what has been happening with the "sub-prime" fiasco - a related if different story).
Part 3a - Johnson was the CEO of Fannie Mae
It turns out that a) Johnson is the former CEO of Fannie Mae, and he was the CEO when he got the discount loans from Countrywide. That is an obvious conflict of interest, because as the CEO of Fannie Mae, he may have shown some favorable bias towards Countrywide, which could have resulted in his acting unethically (read: accounting fraud), as he was benefiting personally from Countrywide's largess. While there is too much smoke in the story to summarize it all, the part I remember best is that Fannie Mae's public disclosure documents for 1999 reported Johnson's 1998 compensation at $7 million, while it later turned out that his actual compensation for 1998 was just under $21 million. Regardless of whether or not any of the extra $14 million was related to Countrywide, it gets the imagination working on what "largess" means in this context.
Part 3b - He never told anyone
And b) he never disclosed the loans to anyone. When Fannie Mae was grilled by regulators in 2004 following its $10 billion accounting scandal, Johnson (by then the former CEO) was put through a disclosure meat-grinder. Yet somehow he never disclosed his $5 million of personal, below-market rate loans from Countrywide, his biggest customer.
Part 4 - Friends of Angelo (WTF?)
A Democratic power broker who remains a paid consultant to Fannie Mae, Mr. Johnson was a major beneficiary of a Countrywide program known as "Friends of Angelo," which arranged loans for friends of [Countrywide] Chairman and Chief Executive Angelo Mozilo at attractive rates.
Today's WSJ
6 comments:
I’m just playing the devil’s advocate, in many other industries, businesses offer favourable rates to their distributors on their own products and services, the favourable market rate he received for his personal loan, would that be one of the perks?
Sure, good point. But a perk from your employer is one thing - it is part of your compensation and it gets reported to the IRS and you have to pay tax on it. It's "transparent". But a perk from a customer, that is not disclosed to anyone, is different. The implications are that you owe the customer a "favor", and that you are not reporting your full income to the IRS, so you are underpaying your tax.
Maybe I didn't answer the question. I think if you give a discount to a business, it usually is a commercial choice - unless you sell something below cost, then its "dumping", and your competitors can sue you. But if you give a personal "gift", you have to disclose it to the tax authorities and often an industry regulator.
Understood.
How did he get away with that without going to jail? That's more interesting to know.
Alan Greenspan once commented that the Fed knew there was trouble with these mortgage lenders. Why didn't anyone do something about it? They are like the Roman Catholic Church, take money from the devotees for blessings and then, reinvest the money in the markets, profit from the investment and God knows what they do with it, and all the wrongdoings are hidden away and so on.
Greenspan's point was about the development of products that were commercially risky, like "adjustable rate mortgages", where you pay a low rate for the first 6 months, but then pay a very high rate afterwards. The idea was that you would resell the property within six months anyway, so it didn't matter. And those have indeed proved to be a problem. But the Johnson thing is about graft. Will he go to jail? I have no idea, but it seems that he could argue that he did not know that he was given special treatment. Hehe.
That's encouraging people to speculate the market which is never good in this economic condition.
People like him should be held accountable and there should be trials and justice.
The author of "Kite Runner" explained in his book about theft being the only sin. In this case, Johnson has sinned and justice should be served.
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