Risk Management Watch: Excessive Risk Pushed Fannie to the Brink
Under pressure from Wall Street firms, Congress and company shareholders, Fannie Mae took risks that pushed the company, and, in turn, a large part of the nation’s financial health, to the tipping point, according to The New York Times. In a recent report, the NYT outlines the events which culminated in the federal government’s $200 billion rescue of Fannie and its corporate cousin, Freddie Mac. According to the report, when Daniel Mudd took the helm of Fannie Mae back in 2004, the company was already under siege. The report states, “Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.”
Facing mounting pressure, between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, states the NYT, citing company filings and industry data. The report quotes Mudd as saying, “Fannie Mae faced the danger that the market would pass us by. We were afraid that lenders would be selling products we weren’t buying and Congress would feel like we weren’t fulfilling our mission. The market was changing, and it’s our job to buy loans, so we had to change as well.”
Fannie had constructed a vast network of computer programs and mathematical formulas that analyzed its millions of daily transactions and ranked borrowers according to their risk. But, according to the NYT, Fannie’s computer systems could not fully analyze many of the risky loans that customers, investors and lawmakers wanted Mr. Mudd to buy. “Many of them — like balloon-rate mortgages or mortgages that did not require paperwork — were so new that dangerous bets could not be identified, according to company executives. Even so, Fannie began buying huge numbers of riskier loans,” states the report.
Between 2005 and 2007, the company’s acquisitions of mortgages with down payments of less than 10% nearly tripled and the market for risky loans soared to $1 trillion. Complicating matters, Fannie didn’t hire a permanent Chief Risk Officer to guard against excessive risk until 2006, the company announced the appointment of Enrico Dallavecchia. According to the NYT, Dallavecchia warned the company should be charging more to handle risky loans and that some markets were becoming overheated and argued that a housing bubble had formed. But many of the warnings were rebuffed, says the NYT. Dallavecchia was among those who were forced out of the company during an announced reorganization in August 2008.
The turmoil at Fannie is just one more example of why risk has taken center stage. Risk management has become an offensive field, reports executive search firm, A.E. Feldman. Corporate boards today face unparalleled levels of business complexity, new regulations and mounting shareholder demands. As a result, A.E. Feldman says risk management jobs are evolving to better manage initiatives to ensure that business objectives are met, losses are minimized, business processes are improved and greater accountability is achieved. Looking ahead, A.E. Feldman adds that senior communications and marketing professionals will also become hot commodities as firms reposition and rebrand themselves.
Material Gaps in Risk Management
The current financial crisis exposes material gaps in risk management – particularly operational risk – and senior finance executives acknowledge that they will need to retool their risk management practices, according to a CFO Research Services study. A whopping 72% of senior finance executives polled say they are more likely to be concerned about their firms’ risk management practices than they are about such issues as accessing both long-term debt financing (65%) and short-term financing (61%), relationships with their financial institutions (59%), pension plan asset allocation (40%) or their ability to secure equity financing (40%).
Moreover, according to the study, current economic concerns have 55% of those polled say their companies are likely to change risk management practices at their companies at either the board or the employee level, or both.
“CFOs and their teams are making decisions in the wake of this crisis that will affect not only their own companies, but the economy as a whole,” said Celina Rogers, Director of Research at CFO Research Services. “The results of this survey show that senior finance executives are certainly concerned about funding their companies in the short term, but the long-term consequences of the crisis – its effect on companies’ ability to carry out strategic plans, and its risk management implications – are also first-order issues to emerge from this crisis.”
A.E. Feldman’s finance division is on top of the latest developments in the financial markets and is constantly researching industry and economic trends. The recruiting firm invites financial and non-financial firms to contact its President, Mitch Feldman, its CEO, Carol Schwam, and its highly specialized team of executive recruiters directly to open up a dialogue about the array of issues they face and those they anticipate in the future. According to Mitch Feldman, “Our lines of communication are open.” Contact Mitch Feldman, and the firm’s expert recruiting teams here.
