Fannie, Freddie, Wall Street, Main Street, and The Subprime Mortgage Market: of Moral Hazards

Fannie Mae is a business entity where ownership was controlled or partnered by the shareholder. It was developed in 1938 by the federal government. The main strategy is to encourage people to invest in the housing market. The company wants to make a stability in mortgage, and make sure customers approach them to purchase and also, they introduced a loan which could help them to invest initially. Since a decade the margin of earning reached $895 billion in the mortgage portfolio. They also partnered with many small-scale companies and invested in Barne's. There was an allegation about investments and ideas of Fannie Mae's in Wall street journal. Yet, no actions were taken by the superiors regarding this issue. Later in 2003, Daniel Muddi CEO raised about it among employees, yet he failed to solve it.

Another major problem is accounting in Fannie Mae's policies which made them invest, buying and holding in mortgage loans which were developed by CFO with no proper analyses about future threats which may pull companies fame and money into risk. They came up with a philosophy to attract people to invest in the mortgage market. They introduced a computer model with "arbitrary volatility" which turned out a different methodology to understand and implement. Much higher management couldn't understand what it does with earnings. They have some fixed rates and interest when they are conveying to the customers but in the end, it differs and made a problem.

Decisions taken by Mr. Howard who is the CFO have mainly two strategies in the plan. One is to set targets to perform in that financial year and next is to analyze it to meet up to it. But, In the year 1998, he changed the way of his operations by setting EPS goals with the company charge sheets which resulted in unstable earnings. In return, they received a warning about their accounting which they need to report internal controls and strategies. All these issues raised a question on ethical behavior of officers in Fannie's.

Later New York Attorney needed to resign because of the truths which came about the Fannie Mae scandal. They make a policy to shift $40 million income in radian insurance, by knowing all these no one dares to take action or question them, everything went according to their plan. Later because of unethical behavior of Fannie employees and policies company went with more mortgages and some internal income crisis which lead them to pay $200 billion to the federal government to restore Fannie. Because of mortgage loans which went with too risky and no proper guidelines made then to reconstruct the firm.