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Thursday, August 07, 2008

Another Version of the Infamous Syron Memo Dust-Up

by Tanta on 8/07/2008 09:40:00 AM

From the Boston Globe:

The credit warnings reported by the Times came not long after Syron arrived in 2004 to fix Freddie, reeling from an accounting scandal in which executives misstated some $5 billion in earnings. In addition, Freddie's commitment to affordable housing had declined to the point it employed gimmicks to meet congressional goals.

For example, said Syron, Freddie would essentially rent loans to meet affordable housing goals, buying them from lenders to carry on the books at year end, then selling them back. Syron ended that practice and re-emphasized the housing mission.

That put him in conflict with other executives, who believed Freddie's most important duty was to ensure investments were safe and sound. The chief risk officer at the time, David A. Andrukonis, warned Syron the loans Freddie was buying risked the financial position and reputation of the company and the country, the Times reported.

But Freddie had to balance the risks against affordable housing goals, Syron said. Andrukonis and other executives disagreed on that balance, he said. Andrukonis was later fired, Freddie officials said.

"The place didn't have enough orientation towards its housing mission," Syron said, "and he disagreed with that approach." Andrukonis couldn't be reached.
This certainly puts matters in a different light. Syron is claiming that when he arrived at Freddie Mac, Freddie was "gaming the system" on affordable housing loans. It was buying pools of these loans, but carrying them only long enough to count them in its year-end affordable housing goals. In the new year, it would sell them back to lenders.

In Syron's version of the story, Andrukonis was advocating that Freddie continue this practice in the name of reducing the risk to Freddie Mac. Syron, on the other hand, felt that Freddie had to take the risk of keeping the affordable housing loans it bought, since that was the whole point of the mandate for the GSEs to buy a certain amount of these loans every year. In this version of events, what Syron was "ignoring" was not the claim that these loans were risky, but the claim that Freddie could avoid this risk just by engaging in "round-trip" transactions that served no economic purpose except fluffing up Freddie Mac's affordable housing goal numbers.

If Syron's version is anywhere near the truth, we have yet more evidence that no good deed ever does go unpunished.

(Thanks, Arnold!)