Barack's Real Estate Friends

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Submitted by michael on June 11, 2008 - 9:43am

Cool piece in Today's WSJ.

Friends of Barack
June 11, 2008; Page A22
Barack Obama may have come up with a creative way to solve the housing recession: Let everyone buy property at a discount the way he did from Tony Rezko, and give everyone in America a discount mortgage the way Angelo Mozilo of Countrywide did for Fannie Mae's Jim Johnson. Team Obama's real estate and mortgage transactions are certainly a change from business as usual. They suggest old-fashioned back-scratching below even current Beltway standards.

A former CEO of mortgage financing giant Fannie Mae, Mr. Johnson is now vetting Vice Presidential candidates for Mr. Obama. But he is also a textbook case for poor disclosure as regulators sifted through the wreckage of Fannie's $10 billion accounting scandal. Despite an exhaustive federal inquiry, Mr. Johnson managed to avoid disclosing one very special perk: below-market interest-rate mortgages from Countrywide Financial, arranged by Countrywide CEO Angelo Mozilo. Journal reporters Glenn Simpson and James Hagerty broke the story this weekend.

Fannie Mae tells us that Mr. Johnson did not inform the company's board of these sweetheart mortgage deals, nor did his CEO successor Franklin Raines, who also received such loans. We can understand why. Fannie bought mortgages from loan originator Countrywide, and then packaged them into securities for sale or kept the loans and profited from the interest. Mr. Mozilo told Dow Jones in 1995 that he was "working very closely . . . with Jim Johnson of Fannie Mae to come up with a rational method of making the process more efficient by the use of credit scoring."

Since Fannie was buying Countrywide's loans, under terms set by Mr. Johnson and later Mr. Raines – or by people in their employ – the fact that Fannie's CEO had a separate personal financial relationship with Countrywide was an obvious conflict of interest. The company's code of conduct required prior approval of such arrangements. Neither Mr. Johnson nor Mr. Raines sought such approval, according to Fannie.

Even if they had received waivers from the board to enjoy these perks, conscientious board members would then have wanted to disclose the waivers to investors. Post-Enron, the Sarbanes-Oxley law requires such disclosures. But even in the late-1990s, when the Friends of Angelo loans began, board members would likely have raised red flags.

Former SEC Chairman Harvey Pitt tells us that "the best way to deal with issues like this is not to have these kinds of relationships. From both the Countrywide and the Fannie perspective, it is simply bad policy to permit loans to 'friends' on more favorable terms than others similarly situated would be able to get."

One question is whether Messrs. Johnson and Raines were using their position to pad their own incomes that were already fabulous thanks to an implicit taxpayer subsidy. (See the table nearby.) But the bigger issue is whether they steered Fannie policy into giving Mr. Mozilo and Countrywide favorable pricing, which means they helped to facilitate the mortgage boom and bust that Countrywide did so much to promote. A further federal probe would seem to be warranted, and we assume Barney Frank and his fellow mortgage moralists will want to dig into this palm-greasing from Capitol Hill.

The irony here is that Mr. Obama has denounced Mr. Mozilo as part of his populist case against corporate excess, calling Mr. Mozilo and a colleague in March "the folks who are responsible for infecting the economy and helping to create a home foreclosure crisis." Obama campaign manager David Plouffe also said in March that "If we're really going to crack down on the practices that caused the credit and housing crises, we're going to need a leader who doesn't owe these industries any favors." But now this protector of the working class has entrusted his first big task as Presidential nominee to the very man who received "favors" in return for enriching Mr. Mozilo.

Yesterday, ABC News asked Mr. Obama whether he should have more carefully vetted Mr. Johnson and Eric Holder, who is working with Mr. Johnson on veep vetting. Correspondent Sunlen Miller noted Mr. Johnson's loans from Countrywide and Mr. Holder's involvement as Deputy Attorney General in the Clinton Administration in the pardon of fugitive Marc Rich. Said Mr. Obama: "Everybody, you know, who is tangentially related to our campaign, I think, is going to have a whole host of relationships – I would have to hire the vetter to vet the vetters."

Vetting Mr. Johnson's finances would have been time well spent, judging by a May 2006 report from Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight (Ofheo). Even if Mr. Obama considers the advisers helping him select a running mate "tangentially related" to his campaign, he might have thought twice about any relationship with Mr. Johnson.

Addressing the company's too smooth (and fraudulent) reported earnings growth in the late 1990s and early 2000s, Ofheo reported: "Those achievements were illusions deliberately and systematically created by the Enterprise's senior management with the aid of inappropriate accounting and improper earnings management . . . By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders."

* * *
The regulator described how, despite an internal Fannie analysis that valued Mr. Johnson's 1998 compensation at almost $21 million, the summary compensation table in the firm's 1999 proxy suggested his pay was no more than $7 million. Ofheo found that Fannie had actually drafted talking points to deflect such media questions as: "He's trying to hide how much he's made, isn't he?" and "Gimme a break. He's hiding his compensation."

To this list we would add one more, directed at Mr. Obama: Is this what you mean by bringing change to Washington?

Submitted by j on June 11, 2008 - 9:55am.

But Obama is going to change everything.

Judge a man by his actions, not his words.

Submitted by Brutus on June 11, 2008 - 10:23am.

If you don't like something Barack has done, then you're a RACIST! Down with the racist right-wing running dogs! RACIST!!!

Submitted by PadreBrian on June 11, 2008 - 10:23am.

So he hires this Johnson guy, to help search for a VP, and now Obama is tagged. lol. okay.

Obama should can him.

Submitted by Ex-SD on June 11, 2008 - 1:41pm.

Johnson is now gone....................Resigned!

Here's a little of what the L.A, Times (quoting the Washington Post) had to say:
Sen. Barack Obama had defended his selection of Johnson yesterday, pointing out that Johnson was an unpaid volunteer. But his defense, according to the influential Dan Balz of The Washington Post, raised more questions about Johnson's role. Balz wrote, "... for Obama to suggest that Johnson is floating in some outer orbit of his campaign raises questions about the candidate's willingness to deal forthrightly with controversy."
To me, it looks like a lot of people and the media are starting to see right through Obama's facade.

Submitted by jficquette on June 11, 2008 - 2:55pm.

Obama is turning out to be a real lightweight. No real substance.

I am still wondering what a "typical white person" is.

Submitted by woodrow on June 11, 2008 - 3:13pm.

So Johnson got a favorable interest rate on his home? Is Obama supposed to personally check every loan that anyone on his campaign (1000s of people) has ever received? Car loans, student loans, home loans, credit cards, etc - Obama should check them all?

GOP is in DEEP trouble if this is the "dirt" on Obama. Wait until this generation of voters learns about the Kaeting 5, McCain's "gook" comments, and Cindy McCain's drug use and theft...

Submitted by michael on June 11, 2008 - 6:58pm.

Johnson (and Tim Raines) ran one of the most corrupt quasi-government institutions - Fannie Mae. They cooked the books to report fictitous earnings in order to earn fat bonuses.

When Enron commits fraud - Democrats (and the media) pull out the "corporate greed" card. When their pet projects, Fannie and Freddie, commit accounting fraud (billions of dollars) not a peep from any.

Woodrow, you're already sounding like the defeated Gore/Lieberman supporters of 2000 or Kerry/Edwards supporters of 2004. I suggest you don't get your hopes up this time around... ya'll picked the wrong guy yet again.

Submitted by woodrow on June 11, 2008 - 10:47pm.

Are you comparing Fannie Mae to Enron? You can't be serious.

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