Business and Finance NEWS

What are Ex-Fannie Mae chief Daniel H. Mudd regrets?

By Amarendra Bhushan for CEOWORLD Magazine Updated:October 30, 2008 Become a writer!

Former Fannie Mae CEO Daniel Mudd wished he said “no” to more of the things the company was asked to do, he told the Wall Street Journal in an interview.

Excerpts from the interview:

Question: Fannie was supposed to be a rock of stability in troubled times. What went wrong?

Mudd: Actually, Fannie Mae was chartered by Congress to provide stability — as well as affordability and liquidity — all the time, not just in troubled times. Balancing those objectives is tough in stable conditions, but in 2008 it became nearly impossible. This exposed the flaw in the business model. Fannie and Freddie are legally required to operate as monoline companies — only in, and always in, the U.S. mortgage market. When that market goes into a depression, the companies are going to fall in tandem.

Question: How we can pick up the pieces?

Mudd: Maybe it is time to move beyond the model of government-sponsored enterprises, or GSEs. The mistake would be to leave the companies in no man’s land — neither private nor public. Where to go from here is an issue that will be waiting for the next president. One option would be to privatize Fannie and Freddie. This would mean two things: eliminating their “government sponsorship” and the requirement that they invest only in housing. Fannie and Freddie would diversify, and operate like other highly regulated financial institutions. Alternatively, the government could become the sole owner-operator by buying the outstanding stock of the companies and placing them under a full guarantee.

Question: What were your main mistakes?

Mudd: I wish I’d said “no” to more of the things the company was asked to do. We were asked — or required — to expand lending, to conserve capital while providing liquidity, to meet housing goals for the underserved, to serve shareholders and homeowners alike. In a crisis of these proportions, something had to give. I should have gone to the government and gotten a clear answer to the question: What do you want — more capital or more lending?

In 20/20 hindsight, I can go through and pick out loans I’d rather not have on the books.

Question: What did you get right?

Mudd: To this day, contrary to popular assumptions, not a penny of government money has gone into the GSEs; so it looks like the capital Fannie raised over the past year — in the face of a lot of criticism — was provident. Second, I think the book of business, which we described warts and all, is much better than what I’ve seen in other institutions.

Question: Why was such a large portion of your business in riskier types of loans?

Mudd: We had fierce debates on how to remain relevant to the market, which was moving rapidly away from us. Our market share had been halved as lenders concentrated on adjustable-rate mortgages and Alt-A and sold those loans through securities created by Wall Street firms. Meanwhile, the Department of Housing and Urban Development had set affordable-lending quotas for us that ratcheted up every year. That forced us to reconsider our down-payment and credit-score requirements. We didn’t accept everything our bank customers were originating, nor did we meet every single lending goal the government set. We struck a balance based on everything we knew at the time.

Question: Was it necessary for the regulator to take over?

Mudd: I argued for the government to define terms under which it would invest and for those terms to encourage, not wipe out, private capital. That would have meant keeping Fannie and Freddie as private companies with a public mission.…I credit the Treasury and the regulator for trying to manage a really tough situation, and trying to balance interests that go far beyond the U.S. housing market.

Question: What are you going to do next?

Mudd: I’m hoping for a call from the Red Sox.

Daniel H. Mudd
Director
Ryder System, Incorporated
Miami , FL
Sector: SERVICES / Rental & Leasing Services

Director , Fortress Investment Group LLC Shares A
New York , NY
Sector: FINANCIAL / Asset Management

Daniel H. Mudd, 46, is Vice Chairman and Chief Operating Officer of Fannie Mae, the nation’s largest financer of home mortgages, and is currently serving as that company’s Interim Chief Executive Officer. As Chief Operating Officer, Mr. Mudd is responsible for originations, marketing, operations, systems, local outreach and administration. Prior to joining Fannie Mae in February 2000, Mr. Mudd was President and Chief Executive Officer of GE Capital, Japan. During his career at GE Capital, Mr. Mudd served in Business Development, International Financing and European Fleet Services. He served as President of GE Capital Asia-Pacific from 1996 to 1999. Prior to his tenure at GE Capital, Mr. Mudd held positions in management consulting and financial services with Xerox Corporation, Ayers Whitmore and Company, and the World Bank. Mr. Mudd was elected to the Board of Directors in July 2002.