Housing Loan Risk Disclosures

Posted by Susan Mangiero on March 13, 2011

Calculator and Pen.jpg

In "Fannie, Freddie Proble Focuses on Disclosure" (March 14, 2011) Wall Street Journal reporters Nick Timiraos and Jean Eaglesham write that the former CEO of Fannie Mae has received a Wells notice from the U.S. Securities and Exchange Commission that alleges knowledge of improper risk disclosures. An earlier response by Mr. Mudd, now CEO of Fortress Investment Group LLC, was published by Bloomberg on March 11, 2011 and describes said disclosures and procedures as "accurate and complete" and "previewed by federal regulators." Click to read "Statement by Fortress CEO Daniel Mudd on SEC Wells Notice" by Lawrence Roberts, Bloomberg, March 11, 2011.

As I wrote on August 28, 2008 in "Fannie Mae Gets a New Chief Risk Officer," changes appeared to be underway at that time, begging for details. For one thing, how was Fannie Mae's new focus on risk management different from past practices? Second, several of the Fannie Mae board members added since early 2004 were no longer listed as active in 2008 but certainly held themselves out as risk management experts. What was their contribution to improving policies, procedures and oversight? According to a November 2007 letter to shareholders by then chairman of the Fannie Mae board Stephen B. Ashley, "These past three years, Fannie Mae has undertaken a series of fundamental changes to remediate our accounting and controls and to put the company on a solid foundation going forward. These changes have done more than fix what needed fixing about the company."

On September 30, 2010, U.S. District Judge Paul A. Crotty granted defendants' motion to dismiss allegations regarding Fannie Mae's "subprime and Alt-A mortgage exposure and financial reporting as to all the Individual Defendants" but denied defendants' "motion to dismiss as to Plaintiffs' allegations regarding Fannie's internal controls and risk management" as to then CEO and Chief Risk Officer, respectively. Click to read "In re Fannie Mae 2008 Securities Litigation," United States District Court, Southern District of New York, filed September 30, 2010.

As I've long predicted, examinations about existing best practices (or lack thereof) are going to continue. If there is a silver lining to the financial fallout and risk management oversight failures that make for headlines aplenty, it is that "good players" will hopefully be rewarded for their discipline and those who have been remiss will start to pay more attention to the nuts and bolts of risk management.

Regarding Fannie Mae and its putative importance as part of the national housing finance market, shareholders and taxpayers welcome insights about who knew what and when and why.

Two Takes on Gold

Posted by Susan Mangiero on February 22, 2011

Gold Bullion.jpg

Gold has received a thumbs up from J.P. Morgan as a form of collateral for repurchase and securities lending transactions. This means that someone will need to assign a value for each unit of physical bullion and then store the amount that relates to estimated counterparty risk. According to "J.P. Morgan Will Accept Gold as Type of Collateral" by Carolyn Cui and Rhiannon Hoyle (Wall Street Journal, February 8, 2011), illiquidity fears have discouraged financial institutions from accepting gold as collateral in the past. The World Gold Council website reports that trading is a 24-hour operation, rendering the global gold market as "deep and liquid."

In contrast, a few days later, it was reported that a 300 million euro pension fund, the Stichting Pensioenfonds Vereenigde Glasfabrieken ("SPVG"), was directed to reduce its gold holdings from 13% of its assets to between 1% and 3%. The reported concern on the part of the Dutch pension regulatory body, the Nederlandsche Bank ("DNB") is price risk. Although gold has risen from $600 per ounce to in excess of $1,000 per ounce since 2008, when the Dutch glassmaking company's retirement scheme purchased bullion, a drop in value could lower the solvency ratio.

Several issues come to mind about the use of gold for financial purposes. For one thing, if I am investing in the stock of a bank that accepts gold as collateral for a large amount of transactions, I'd like to know if the bank is hedging the metal and, if so, to what extent. I'd also like to understand how they price commodities like gold and the frequency with which they reassess counterparty risk. For an institutional investor like a pension fund that holds gold as an investment, it would be helpful to understand: (a) whether they own physical quantities or stock in a company that mines the metal (b) how value is assessed and on what basis (c) whether gold holdings are hedged and, if so, to what extent (d) what role gold plays (i.e. diversification, safety, etc). An economic analysis of the risk-return for gold, like anything else, is paramount and must consider multiple factors, some of which are listed here.