Fannie’s Regulators Have Been Lying For Over A Decade

"The content of this report, in my view, cannot be legitimately questioned,” said Rep. Richard Baker (R–La), who cited the imprimatur of a Big Four accounting firm. “Utilizing the firm of Deloitte & Touche and the staff of OFHEO [Office of Federal Housing Enterprise Oversight], the director's report is delivered after review of over 200,000 documents and e-mails, as well as hundreds of interviews and depositions of current and former staff of Fannie Mae,” he said. The hearing he convened on October 6, 2004 was titled, "The OFHEO Report: Allegations Of Accounting And Management Failure At Fannie Mae."

According to Falcon, the Fannie Mae accounting scandal that was HUUUGE.  And Deloitte backed up his findings 100%.  “Deloitte assisted us in this work and they support the findings, they agree with the findings in this report as well, but this is the work and the judgments of OFHEO,” he said. Deloitte agreed because everything was so obvious. "We feel very strongly that these are black and white accounting issues,” testified Falcon.  "These are not issues of interpretation."

Though one congressman, Ruben Hinojosa, thought the story sounded odd:

Mr. HINOJOSA. You also mentioned that you did not speak to nor review the working papers of KPMG accounting firm while preparing this report. It seems to me that it is less than clear, then, that Deloitte has signed off on your OFHEO findings.MR. FALCON. Deloitte fully supports the findings and conclusions of this report. They also view these accounting issues as very clear-cut violations and not matters of interpretation.

Falcon lied. Deloitte never offered any kind of support for the allegations made by OFHEO, as a member of the firm later testified. The so-called accounting issues cited by Falcon were not violations at all, according to the broad consensus of accounting experts. Almost all of the alleged accounting violations pertained to form, as opposed to substance, as explained below.

Falcon said those supposed violations posed a serious threat to Fannie's safety and soundness, when in fact they were irrelevant to safety and soundness. (The term safety and soundness is not an empty platitude. It refers to a highly developed methodology for regulatory oversight known as CAMELS.)

OFHEO’s much-lauded Interim Report is a tale told by an idiot, full of sound and fury, signifying nothing. It purposefully excludes the critical pieces of information that explain the absurdity and triviality of the report’s conclusions.

Corruption At Fannie's Regulator Dates Back Many Years: Though the hearing and the OFHEO report date back to the fall of 2004, they remain edifying and timely. The Fannie Mae “accounting scandal” can be seen as a precursor to the case for conservatorship made four years subsequent, and to the notorious Third Amendment sweep announced in August 2012.  They reveal the extent to which the OFHEO was riddled with corruption, and they point to the continued presence of high level officials at the agency who actively defrauded Congress and the public about Fannie Mae's finances. The lies and distortions and fraud, which were all embedded in that report and in the testimony of OFHEO officials, launched an ongoing interagency effort, which has spanned over a decade, to put the GSEs out of business by various means, legal or illegal.

The phony scandal also foreshadows Deloitte’s role in sanctioning the fraudulent loss provisions used to validate the government takeover in September 2008. To be clear, Deloitte never publicly attached its name to the hyperbolic reports cranked out by OFHEO in September 2004 and in May 2006. But the firm knowingly allowed its name to be used in support of a massive fraud. And it seems obvious why. The phony scandal forced Fannie to replace its existing auditor, KPMG, with Deloitte.  After Deloitte was instated as Fannie’s outside accountant, auditing fees increased 1000%.

Nobody Wanted To Suggest That Armando Falcon Was Clueless: It's hard to appreciate the complete idiocy of the proceedings that morning on October 6, 2004 unless you frame it in the context of accounting basics. Whenever you accuse somebody of violating accounting rules, you must address three questions upfront:

1.               Where are the debits and credits supposed to go?

2.               Where, if anywhere, did the debits and credits show up instead?

3.               How were people deceived by the misplacement of the debits and credits?

There is no other way to explain what happened. If the accuser does not have a clear and cogent response to those three questions, you know, with absolute certainty, that he is clueless. And everyone on the receiving end of his accusation is clueless as well. If you read a report that waxes profane about generally accepted accounting principles and FAS 133 and highly effective hedges, it’s all blah, blah, blah nonsense until you know where the debits and credits are supposed to go. Read the "Interim Report," to see if it addresses those three questions. Rep. Baker and the other congressmen who endorsed the report and professed to be shocked by its findings had absolutely no idea what they were talking about. 

Fannie’s “violations” misled nobody. As I explained before, the hoopla was over the fact that Fannie fully disclosed its mark-to-market gains and losses on derivatives in the Statement of Changes In Shareholder Equity, instead of in the Profit & Loss Statement. The derivative income/(loss) was labeled as Other Comprehensive Income/(Loss).  The difference, to anyone who is financially literate, is like the difference between putting the footnotes on the bottom of the page versus the back of the book.  Either way, the information is readily accessible to anyone with half a brain. The answer to Question 3 is that nobody could be deceived.

Which is why OFHEO's team took such extraordinary steps to avoid giving any cogent explanation of what was going on.  You may wonder, why were so many people spinning their wheels for so long over such a silly issue? It all has to do with the power of propaganda and doublespeak. As I've noted before, it is one of the great Emperor's New Clothes phenomena of the 21st century.  The fallout of this stupid scandal led to close to $1 billion in litigation costs incurred through 2013. 

What was really wrong with Fannie’s hedges? Oh, and why did OFHEO say that Fannie had disclosed the mark-to-market losses in the wrong part of the financial statement? The primary reason was because Fannie's hedges were not "highly effective,” according to OFHEO's interpretation of Financial Accounting Standard 133.

OFHEO was primarily referring to Fannie’s purchases of plain vanilla interest rate swaps. Fannie continually rolled over $250 billion in 90-day discount notes on its balance sheet. Fannie had also entered into interest rate derivatives, swapping 90-day Libor to 10-year Treasuries. The idea was that, whenever Fannie purchased a swap, it locked in its prospective financing cost, which equals the sum of the interest payments and the swap payments, on Day 1.

There was one wrinkle. Libor is quoted five days a week, whereas Fannie issued its 90-day notes on Wednesdays only. As a result, it was possible, indeed likely, that the swap payment dates and the interest payment dates would not be identical. As a result, it was possible that the all-in financing cost might be slightly different from what had been calculated on Day 1. If the yield curve between the 90-day rate and the 97-day rate had shifted between the swap payment date and the interest payment date, Fannie would pay more or less than it had originally expected.

Fannie calculated the dollar impact of that mismatch between swap dates and interest dates for fiscal year 2003. It was $247,792, or less than a quarter million dollars, in the context of $8 billion Fannie earned by financing $2.1 trillion in mortgages that year. KPMG deemed the discrepancy to be immaterial.

Yet Christopher Dickerson, the author of the OFHEO Report, deemed the accounting of this quarter-million discrepancy to be a major threat to Fannie's safety and soundness. Really, you cannot make this stuff up.

Just about none of that information is disclosed in the report because the truth would make Christopher Dickerson, and everyone else involved, look monumentally stupid. Dickerson lied and said that Fannie did not test the effectiveness of those hedges. He didn't want anyone to see this, this, or this.

An $11 billion phantom “loss.” Eighteen months later, OFHEO doubled down with the kind of chutzpah that would have embarrassed Donald Trump.  It said that about $10 billion in mark-to-market losses previously disclosed by Fannie as Other Comprehensive Income/(Loss) had not been disclosed. Consequently, OFHEO and the SEC had uncovered a huge scandal! Wherein $10.6 billion had been hidden from the public!

"Fannie Mae's accounting policies and practices did not comply with Generally Accepted Accounting Principles," said OFHEO.  Consequently, "errors resulted in Fannie Mae overstating reported income and capital by a currently estimated $10.6 billion."

SEC Chairman Christopher Cox piled on. "The significance of the corporate failings at Fannie Mae cannot be overstated," he told Congress in June 2006. "The company has estimated its restatements for 2003 and 2002 and for the first two quarters of 2004, will result in at least an $11 billion reduction of previously reported net income. This will be one of the largest restatements in American corporate history."

The SEC and OFHEO estimated that Fannie lost $11 billion, but the new restated financials showed that equity had increased by $4 billion. That's a $15 billion swing. What happened? How was it that the SEC and OFHEO made a $15 billion mistake? I have been told by people choose to the situation that I was the first person to write about that disconnect. And yet, the class action lawsuit alleging securities fraud labored on into 2012.

Fannie’s accusers exploited another verbal sleight of hand. Under the regulations, income and losses deemed Other Comprehensive Income were excluded from regulatory capital. This makes sense. Fannie’s interest rate swaps were used to hedge the interest rate risk embedded in 30-year mortgage loans held on the balance sheet. The loans were held at historical cost, but the swaps were always marked to market, leading to a major disconnect. Consequently, GAAP earnings did not reflect the economics of the hedges.

However, once those mark-to-market losses or gains are transferred to the P&L as dictated by the SEC, they are considered part of regulatory capital.  So poof! Eleven billion in capital goes out the window. Of course, the economic impact is zero. Which is a reminder to anyone who ever covers anything to do with accounting. You don’t know what the heck somebody is talking about until he gives you a before-and-after explanation of the debits and credits.    

The consensus view among just about everyone in Washington and in the financial press is that the Fannie Mae “accounting scandal” is a proven fact, an example of corporate corruption and gross mismanagement by its senior executives.  Who would question the considered judgment of, not one, but two OFHEO directors, the Chief Accountant at the SEC, and the Chairman of the SEC, who can point to two different reports which were the culmination of a three-year investigation? After they resigned in disgrace, the former Fannie executives forced Fannie to reimburse them for their outrageously large legal fees, according to the dominant media narrative.

An Emperor’s New Clothes Scandal:  How crazy was this whole thing? Here's a taste of one of the stranger-than-fiction aspects. In 2012, the judge presiding over a securities class action lawsuit pertaining to this same "accounting scandal" asked the plaintiffs' attorney to present the best piece of evidence showing that Fannie's former CEO, Franklin Raines, had any intent to deceive anyone. The attorney couldn't come up with anything.  He pointed to a statement made by Raines on CNBC about FAS 133, which was supposedly contradicted by an email sent by Fannie's controller to Raines. The controller's email, which dealt with debt redemptions, had nothing to do with Raines' CNBC statement, which referenced violations by Freddie Mac. The judge looked at the memo and could not find anything improper. Yet the lawyer had no expert witness to support his claim. Nor had the law firm ever bothered to ask Raines, when he was deposed, whether he had even seen the email.  So the judge ruled that none of it could be considered evidence, and then the plaintiff's attorney suffered one of those Tony Soprano episodes, where he blacked out and collapsed in the courtroom.

The lawyer recovered. But think about it. This was the culmination of eight years of discovery in a litigation process involving dozens of high powered lawyers and expert witnesses and consultants. As it turned out, none of the deposed defendants--not Raines, not former Fannie CFO J. Timothy Howard, not former Fannie Controller Leanne Spencer--had ever been asked to explain the major documents cited by the plaintiffs to justify their cause of action.  Have you ever heard of anything so ridiculous? Judge Leon eventually ruled that there was no, as in zero, credible evidence against Raines, Howard or Spencer. The judge noted Howard’s “overwhelming evidence of good faith.”

The really extraordinary thing is that nobody in the drawn out saga ever said, let's cut to the chase and address how were the debits and credits misplaced so that people were deceived?  Because if you don't do that, the conversation devolves into a blind men describing an elephant routine. Which persists to this day.

Blumenthal’s Brainchild To Short-circuit The Examination Process: This entire travesty, this vast disinformation campaign was the creation of Falcon's consigliore, OFHEO special counsel, Stephen Blumenthal, who was determined to drive down the price of the GSEs' stock as a way to put them out of business. As he explained in a research report he wrote when he was at Schwab, Congress would be forced to downsize the GSEs’ charters if the companies' stock prices plummeted. Shortly after joining agency, he conducted meetings about the “New OFHEO” advising officials to take punitive actions against the GSEs in order to push their stock prices down.

His agenda was to ambush the GSEs with false and misleading stories in the press about GSE malfeasance, and he assembled a small but reliable cadre of reporters and analysts, lapdogs eager for scoops, to do his bidding. Everyone involved in the effort was able to exploit the D.C. convention that a leaker who happens to be a high level government official is presumed to be pre-vetted. Consequently, the credibility of his information need not be doubted.

Blumenthal restructured OFHEO so that it would pursue his agenda by short short-circuiting the agency's examination process. He set up a special unit, the Office of Compliance, with a Special Examination Unit. Blumenthal placed Christopher Dickerson, one of the most important financial reprobates you never heard of, in charge of the Special Examination process, which began in June 2003 and continued until publication of its “final” report in May 2006.

During that three-year period, the Special Examination by Office of Compliance displaced the regular examinations.  As OFHEO's Chief Accountant, Wanda DeLeo, testified, “all the office of compliance, the majority [OFHEO’s accounting] staff, not a hundred percent of their time but some of them a hundred percent,” of their time was devoted to Dickerson’s Special Examination. Consequently, OFHEO did not conduct its annual safety and soundness examinations during that period.

Money Talks: At Rep. Baker’s hearing in October 2004, the smartest guy in the room—perhaps the only one who understood accrual accounting for financial institutions, plus the regulatory concept of safety and soundness—focused on the numbers. Barney Frank wondered if Falcon had pulled a number out of thin air.

MR. FRANK. Then the question is the derivatives and the hedge accounting. The potential misstatement there is I guess part of the reason that you asked for the 30 percent increase in capital because it might have been a misstatement. But my understanding is you have come to no conclusion as to what the amount of a potential misstatement was. Is that correct?MR. FALCON. That is correct.MR. FRANK. Could it have been an under-estimate as well as an over-estimate?MR. FALCON. Potentially.

And then later:

MR. FRANK. With regard to derivatives, you have told you me you cannot even say at this point whether they have under-reported or over-reported earnings. How does this threaten the safety and soundness, what you have uncovered, of Fannie Mae?MR. FALCON. Just the very fact that we have serious doubts about the accuracy of the financial statements and their books and records, the very fact that we have identified very serious internal controlsMR. FRANK. Well, let me ask a question. Does any accuracy threaten the safety and soundness? That is what bothers me. There is a quality and a quantity issue here.There are inaccuracies that can be disturbing, and if they led to inappropriate compensation, I would be very unhappy. But the notion that any inaccuracy implicates safety and soundness, I think, based on what you have said here, where you cannot even conclude—you have said you cannot even quantify any potential amount of loss. To throw ''safety and soundness'' around in that thing I think really is, for a regulator, irresponsible.

Putting the money in one column instead of another doesn’t add or subtract dollars.  Of course, the truth was, that Falcon knew, or should have known, exactly what the impact was on total income. It was zero. Of course, if Falcon admitted the truth, he would have alerted everyone to the utter triviality of the issue in question. The former Chief Accountant of the SEC explained how the numbers washed out when he was compelled to testify for a class action lawsuit.

PLAINTIFFS' LAWYER: And with respect to the quantity or the amount of -- that the restatement would result in, you didn't know whether it was going to add to or subtract from the earnings of the company, did you, at the time?FANNIE MAE LAWYER: Objection.NICOLAISEN: Yeah. I mean, the information -- the information is actually in the financial statements as to losses that are deferred on hedging contracts. A lot of that has already been -- had been recorded through equity, not through the income statement. So when you look at the financial statements, you can be -- their financial statements at that point in time, you can be quite certain it's not going to result in a gain. But if you restate the financial statements, the gain that that loss then would be recognized earlier in gains would be recognized subsequently. End of the day net zero.It's the periods in which the gains and losses are recognized for accounting purposes. It's different than the economics of the transaction. It's different than the -- how someone may manage their business, but the accounting itself calls for recognition based upon defined criteria in specific periods of and that you have appropriately informed investors and that the earnings as you would apply hedge transactions differ from hedge accounting, you're free to talk about that. You're free to -- you're free to describe that end of the day this is -- it's not -- it's not -- again, it's a zero sum game. That is, if you recognize the loss now, you recognize the gain later. If you recognize -- if you don't recognize the loss currently, you recognize the loss later. If you have managed your business differently than that, you certainly could continue to talk to your investors on the basis on which you manage your business.Now, I'm not sure that's clear, that I have been clear to you or that you understand what I'm saying.PLAINTIFFS' LAWYER: I understood the context. I can follow on with that. And I do understand, I think, what you've just said.NICOLAISEN: But what I was saying is I'm not — did not conclude that the economics of Fannie Mae's activities were improper in any way.

Nicolaisen's testimony also alludes to the fact that this is accounting for timing differences, so that mark-to-market losses always become cash losses when the instrument is liquidated.

Circling back, the sophistry in Falcon’s answer—“Just the very fact that we have serious doubts”—describes the essence of the government’s case for placing Fannie and Freddie in conservatorship, which was based on “critical concerns” that Christopher Dickerson pulled out of his hat. OFHEO—just like the OCC, the FDIC, the OTS and the regional Federal Reserve banks—was a safety and soundness regulator. But OFHEO had perverted the meaning of safety and soundness to fabricate its case against Fannie Mae’s accounting and to fabricate its case to justify conservatorship.

An SEC Chief Accountant pulls his opinion out of his hat. To sophisticated observers, analysts who followed Fannie and understood accounting for derivatives, Frank made Falcon look like a fool. But Falcon had a comeback. He enlisted the help of people at the SEC. More remarkably enough, he got the Chief Accountant of the SEC, Donald Nicolaisen, to back him up.

Raines had asked the SEC to review Fannie’s accounting following the October 6, 2004 hearing. He looked at that quarter-million discrepancy and then met with Raines for this dramatic exchange dutifully recounted by The Wall Street Journal:

Raines took issue with the accounting rule for derivatives, known as FAS 133, at the center of the controversy."Many companies can and do comply with the rules," Donald Nicolaisen, the SEC's chief accountant, shot back, according to two participants. "Sir, hedge accounting is a privilege, not a right," he continued. "[It] is applied only under strict circumstances, and you did not comply."Mr. Raines seemed shocked, participants say. He then asked how far off Fannie's books had been in relation to FAS 133. In response, according to one participant, Mr. Nicolaisen held up a sheet of paper and told Mr. Raines that if it represented the four corners of the rule, "you were not even on the page.".

One of the reasons why accounting rules are so difficult to read is because they are designed to cover all possible situations. FAS 133 was drafted to deal with derivatives and hedges. There are thousands of different derivatives, many of which are custom made. And there are thousands of different economic exposures hedged by derivatives. So you can imagine that a newly enacted accounting standard that attempts to cover the entire range of derivatives and hedge transactions would be very complicated and very much open to interpretation.

Which means that unless you go into specifics—which derivatives are being used which way to hedge which market price risks—nobody knows what you are talking about. Which was all part of the scam.

Remember, professional accounting opinion is just like a legal opinion. The accountant reviews the facts and circumstances, then he cites the applicable rules, then based on his analysis of how the rules apply to the facts, arrives at an opinion. And if you’ve ever worked with accountants, you learn their rule that everything needs to be documented.

Nicolaisen's position was unique. The Chief Accountant of the SEC is a one-man Supreme Court when it comes to interpreting accounting rules. So Nicolaisen's opinion dictated how everyone else was bound to interpret the rules. Nonetheless, if you present an accounting opinion, you must have something to show for it. Clarence Thomas can’t just proclaim, “The Affordable Care Act is unconstitutional just because I feel like saying so.”

Which was why the SEC objected to Nicolaisen being deposed, citing the deliberative process privilege. Lawyers pressed Nicolaisen to explain his decision, to give some reasons why he arrived at his conclusion. He refused to come up with any. Instead he offered up plenty of meaningless verbosity, which, when translated into plain English, proved that he had never made any kind of professional assessment of Fannie accounting. His testimony, before Congress and before the lawyers who questioned him on November 19, 2009, was a sham.

PLAINTIFFS' LAWYER: What did you observe or what do you understand to -- let me withdraw the question. What was it that you saw, if anything, that led you to determine that Fannie Mae had not delivered appropriate information to its investors or to the marketplace?FANNIE MAE LAWYER: Objection.OTHER FANNIE MAE LAWYER: Misstates testimony and the document.FANNIE MAE LAWYER: And it calls for a legal conclusion. Jim, this is entirely inappropriate for a fact witness.PLAINTIFFS' LAWYER: Go ahead.NICOLAISEN: What -- again, separate economics from accounting --PLAINTIFFS' LAWYER: Yes.NICOLAISEN: -- my conclusion was that the basis for the hedge accounting as applied -- particularly hedge accounting, but also FAS 91 as applied by Fannie Mae was not sufficient and therefore restatement should be undertaken and that restatement would then deal with the --the GAAP financial statements.PLAINTIFFS' LAWYER: Do you recall any specific facts that stand out in your mind now that form the basis for your decision to -- to require the restatement because some -- that relate somehow to this clause about provide investors with appropriate information?FANNIE MAE LAWYER: Objection. Counsel, just because you're not using the word "opinion" doesn't mean you're not asking for an opinion.PLAINTIFFS' LAWYER: I'm sorry, I didn’t hear you.FANNIE MAE LAWYER: This is impermissible testimony.PLAINTIFFS' LAWYER: I'm sorry. I can't hear you.FANNIE MAE LAWYER: I said just because you don't use the word "opinion" doesn't mean you're not asking for an opinion. This is still impermissible testimony under Rule 702. I'm going to continue to object.PLAINTIFFS' LAWYER: Noted.PLAINTIFFS' LAWYER: Go ahead, sir.NICOLAISEN: Again, I may be repeating myself, but what I believe to be inappropriate was the GAAP financial statements, the use of hedge accounting as undertaken by Fannie Mae and the accounting for that, not -- not the transaction, but the accounting for it and therefore investors are entitled to have GAAP financial statements that are consistent with the accounting standards that are part of it.    So the question?PLAINTIFFS' LAWYER:Can you indicate for the record what facts you based your statement on that reads as follows: "In my view, it was outside professional accounting standards"? What was the factual basis for that statement?MR. DELINSKY: Objection.MR. REGAN: Objection. Scope. Move to strike elicited testimony.NICOLAISEN: What I expressed was my view and professional judgment. There's no question that it was a professional judgment viewing the facts as submitted by Fannie and as presented in OFHEO's report supplemented by lots of discussion and additional questioning as to what things meant, other documents examined by my staff and looked at, and, in my opinion, it was outside the professional bounds.But that is an opinion. I mean, I'll be very clear also in saying a lot of other people concluded otherwise.PLAINTIFFS' LAWYER: So they did, apparently. The -- you also indicated in the next question and answer the following -- well, let me read the question. It's right down at the bottom of that page. Chairman Baker –NICOLAISEN: Still Page 15?PLAINTIFFS' LAWYER: Yes, still 15.NICOLAISEN: Okay.PLAINTIFFS' LAWYER: It's the very -- right below this sentence that we just looked at. Chairman Baker said: "Is it so difficult for a public operating company to comply with FAS 91 and 133 that it is patterned and practiced within the rest of the public operating company world that companies just don't get it right, or are there other companies out there who, in your view, do not find appropriate manner in which to comply with the rules as you see them?" You answered the following: 'l believe that other companies are complying with statements 91 and 133. I have reason to believe that the standards are workable and are being followed."Were any of those -- tell me what the factual basis was for your making this first statement, which is, "I believe that other companies are complying with statements 91 and 133."MR. DELINSKY: Objection.MR. STERN: It's a hypothetical that requires expert opinion.NICOLAISEN:Yeah. It clearly is a professional judgment that I'm expressing here. It was -- it was my view, not necessarily shared by others, but it was my view based upon -- and I'm not sure I can give you all of the citations or all the meetings or all the activities that occur where I've had a general view that people were complying with statements 91 and 133. Having said that, I guess, even I was surprised by the number of companies that after the Fannie Mae restatement actually restated for 133. I don't recall much around 91. But I do recall a number of restatements for 133.

If you didn’t follow, it’s because it made no sense. Let's walk through the nonsensical aspects to Nicolaisen's testimony. In his professional opinion, Fannie's accounting treatment was outside professional bounds. He's saying that a consensus of other accounting professionals would interpret the same rules, when applied to the same facts and circumstances, the same way that he did. As the time, his statement seemed highly provocative, because the professional opinion of Fannie's Big Four auditor, KPMG, was oppositional to Nicolaisen's. And he emphasized that this was in no way, shape or form a close call. He echoed and amplified the testimony of Armando Falcon.

But the only way to know whether Fannie's accounting treatment was inside or outside the bounds accepted by other accounting professionals is to find out how others are interpreting the same issue. Don't forget, they are called generally accepted accounting principles. Nicolaisen didn't do that, and then he professed to be surprised that a large number of other accounting experts had agreed with Fannie Mae's interpretation and disagreed with his interpretation.

In fact a broad consensus of accounting experts, from the Financial Accounting Standards Board, KPMG, Ernst & Young, PriceWaterhouse Coopers, and elsewhere, specifically endorsed Fannie's original interpretation of FAS 133.  Almost 300 other major companies—including Citigroup, Bank of America, GE Capital, Ford Motor Credit—had applied the same rules the same way that Fannie did. 

To excuse his failure to inquire about the professional opinions of other accounting experts, Nicolaisen insinuates, "that's just my opinion," and others were free to disagree, as if it were his opinion about which movie should get the Oscar for Best Picture.  There are two problems with insinuation. First of all, Nicolaisen didn't offer his opinion, he offered a professional opinion. Second, it reflects a cavalier disregard for his responsibility and authority as the Chief Accountant of the SEC. The Chief Accountant of the SEC is a one-man Supreme Court when it comes to interpreting accounting rules. So Nicolaisen's opinion dictated how everyone else was bound to interpret the rules. Everybody else was forced to restate their financials, until the SEC reversed back to Fannie’s original approach in 2007.

It was certainly within Nicolaisen's power to say that he didn't care what anyone else thought, his interpretation of FAS133 dictates how everyone else must apply the rule.  But again, he said this was his professional opinion which must be based on an analysis of the facts as they apply to the rules in order to arrive at a conclusion. Imagine if the IRS Commissioner said he reviewed Fannie’s tax return and found that it violated the internal revenue code. And when asked to explain his reasoning, the Commissioner kept saying I reviewed the tax return and the internal revenue code and arrived at my opinion. Nicolaisen’s testimony was equally ridiculous.

The fallout was that Fannie was prevented from filing any financials with the SEC until December 2006. And it was forced to pay a $400 million fine.

Though The Washington Post covered the Fannie "scandals" at length, it never printed anything to inform its readers that the private lawsuits against its former executives were dismissed because of the absence of evidence. 

Post-Script: Baker’s 2004 Hearing Was Repurposed for the 2008 Meltdown

One of the many ironies of Rep. Baker's hearing is that a carefully edited video of the proceeding became a YouTube sensation beginning in late 2008. I ran across in the comments section of a Huffington Post piece I wrote, "Fox News: Barney Frank Escaped Blame for Fannie Mae's Problems Because He Is Gay." Someone wrote, “How do you explain this?” and inserted the video.  At that time, I knew almost nothing about the Fannie Mae or the conservatorship that had surrounded the company for years. I just knew, as anyone who read The Wall Street Journal would have known, that it had nothing to do with the September 2008 meltdown, which was triggered by private label securitizations.  

The video makes it seem that some representatives saw dangers that led to the crisis and some representatives were attacking the messenger, Falcon, who warned about the dangers that lurked within Fannie. Mae. Of course it was ridiculous, since the issue at hand had nothing, zero, to do with lending or credit risk.  All of the representatives attacking the messenger were black, except for one gay Jew. And all of the representatives who expressed alarm at the messenger’s dire warnings were white.  The black representatives lauded the performance of Franklin Raines. It took eight years of litigation to confirm that Franklin Raines' allies were absolutely right about their assessment of the situation. 

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