Did Fannie, Freddie Use Incentives To Boost Stocks?

Neil Weinberg, senior editor at Forbes magazine, talks with Renee Montagne about whether executives at Fannie Mae and Freddie Mac used financial incentives to pump up the mortgage giants' stock prices.

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RENEE MONTAGNE, host:

Treasury Secretary Henry Paulson visited the headquarters of Freddie Mac yesterday and gave a pep talk to employees. The Treasury secretary and other government officials are meeting senior executives at both Freddie Mac and Fannie Mae to figure out how to get the companies back on track.

Also in the works: an investigation into the way the mortgage companies managed their accounts. To find out more, we called Forbes senior editor Neil Weinberg.

Thank you for joining us.

Mr. NEIL WEINBERG (Senior Editor, Forbes): My pleasure.

MONTAGNE: You know, let me begin with a quote in a news story from Senator Richard Shelby. He's the ranking Republican on the banking committee. He said that when the Treasury and their financial advisors got into Fannie and Freddie's financial books, they - and I'm quoting - "found out they had a house of cards." What kind of accounting maneuvers were they using?

Mr. WEINBERG: Well, the biggest one that seems to have been of great concern to the U.S. Treasury was the fact that about half the money that these companies had aside, the capital that they were going to use to cover the emerging bad debt problems with their mortgages was coming from deferred tax credits.

Essentially, this means that in the future, if you have a profit, that you can not pay a certain amount of taxes based on previous losses. Now from an accounting point of view, this may be capital. But in reality, this is not money that's in the bank, and it's not money that these organizations can pull out to cover the bad debt that is mounting on their books.

MONTAGNE: These two CEOs were brought in back in 2003 after accounting scandals at both Fannie Mae and Freddie Mac. Is this sort of creative accounting that we're seeing right now, is this a repeat of that previous scandal?

Mr. WEINBERG: I think, in some ways, it is a repeat. This doesn't mean that they're walking exactly in the tracks of their predecessors, but you have senior executives at these companies who, like the senior executives of many companies, are financially compensated for the stock going up.

So they have a strong vested interest in making the books look as pretty as possible.

MONTAGNE: Is any of this, on the face of it, criminal?

Mr. WEINBERG: On the face of it, none of this is criminal per se, but you can be assured that the government will be looking closely through the books to see what type of other accounting gymnastics may have occurred. And exactly where they stepped over the line, or if they stepped over the line, I think it's too early to say. But certainly this is a concern that has been particularly prominent in the mind of regulators since the last Enron and WorldCom collapse, and we passed legislation, which was supposed to curb these type of abuses. So-called Sarbanes-Oxley legislation passed in 2002 seems to have done little to clean up corporate America's accounting act.

MONTAGNE: Neil Weinberg is a senior editor at Forbes magazine, and he co-authored a book about accounting fraud at MCI-WorldCom called "Stolen Without a Gun." Thanks very much for joining us.

Mr. WEINBERG: My pleasure.

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