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Fraud at Fannie Mae

In 2004, the Office of Federal Housing Enterprise Oversight released a report alleging gross financial overstatements at Fannie Mae as a result of glossing over losses to pad executive bonuses. The government sponsored mortgage company was fined $400 million and more than thirty executives, including the CEO, are subject to disciplinary action and termination. Now official, the two year audit of records between 1998 and 2004 has concluded $6.3 billion in overstated earnings. SEC Chairman Christopher Cox said, "Fraudulent financial reporting cheats investors of their savings. Those whose actions led to the accounting fraud you’ve heard described today will be vigorously pursued."

Fannie Mae is in the business of ensuring that American’s have the money to purchase homes. This is accomplished by buying mortgages from local lenders and then repacking them as mortgage backed securities offered to investors. As such, lenders have a steady cash flow to loan to buyers and Fannie Mae makes money from investors who assume there is low risk of the mortgages defaulting. Even if the large numbers of loans default, Fannie Mae is backed by government tax dollars. The problems arose because Fannie Mae has a near limitless influx of cash combined with an exemption from reporting to the SEC and from paying taxes, which essentially allowed creative bookkeeping.

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There is no Spoon by VnutZ

I am actually quite amazed at the financial world sometimes. It’s like, some businesses have crafted an ability to exist and make exorbitant sums of money … for nothing.

If you actually look at this process, there is no spoon – errr … money. Alice wants to buy a house, so she approaches Bob and obtains a mortgage. Alice now owes Bob money. Bob has lent out everything he’s got and can no longer make loans, so he sells the mortgage to Charlie (the company in this case) for cash so he can repeat the process. Bob now has no risk and makes money on the interest Alice pays him. Now Charlie is stuck with all these mortgages. Because Charlie is bigger than Bob, Charlie ultimately has more of these together and rolls them up so that David, an investor, can buy them. Charlie essentially passes the "guaranteed interest payments" off as a return to David. In theory, David has no risk as long as all the home buyers do not default. Now Charlie has no risk and also has cash again so he can repeat his process – or invest it in something else to make gobs of money. Now imagine that David didn’t buy the investment – Alice did. You have an endless loop of money paying itself while all the while, Charlie gets super-rich. Ridiculous!

There is no spoon. Our entire economy is make believe.

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