Monosyllabic Pedantry

Friday, March 27, 2009

Chicago Politics gone Federal

Man, the hits just keep a comin'. Every day, there's new stories highlighting what a bunch of crooks have been elected into the white house. Thanks a pantload, liberals.

The White House Chief of Staff Rahm Emanuel

Before its portfolio of bad loans helped trigger the current housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors by a top federal regulator.

One of those allegedly asleep-at-the-switch board members was Chicago's Rahm Emanuel—now chief of staff to President Barack Obama—who made at least $320,000 for a 14-month stint at Freddie Mac that required little effort.

He was named to the Freddie Mac board in February 2000 by Clinton. The board met no more than six times a year. Unlike most fellow directors, Emanuel was not assigned to any of the board's working committees, according to company proxy statements. Immediately upon joining the board, Emanuel and other new directors qualified for $380,000 in stock and options plus a $20,000 annual fee, records indicate.
On Emanuel's watch, the board was told by executives of a plan to use accounting tricks to mislead shareholders about outsize profits the government-chartered firm was then reaping from risky investments. The goal was to push earnings onto the books in future years, ensuring that Freddie Mac would appear profitable on paper for years to come and helping maximize annual bonuses for company brass.

The accounting scandal wasn't the only one that brewed during Emanuel's tenure.

During his brief time on the board, the company hatched a plan to enhance its political muscle. That scheme, also reviewed by the board, led to a record $3.8 million fine from the Federal Election Commission for illegally using corporate resources to host fundraisers for politicians. Emanuel was the beneficiary of one of those parties after he left the board and ran in 2002 for a seat in Congress from the North Side of Chicago.

The board was throttled for its acquiescence to the accounting manipulation in a 2003 report by Armando Falcon Jr., head of a federal oversight agency for Freddie Mac. The scandal forced Freddie Mac to restate $5 billion in earnings and pay $585 million in fines and legal settlements. It also foreshadowed even harder times at the firm.
Many of those same risky investment practices tied to the accounting scandal eventually brought the firm to the brink of insolvency and led to its seizure last year by the Bush administration, which pledged to inject up to $100 billion in new capital to keep the firm afloat. The Obama administration has doubled that commitment.
By the time Emanuel joined Freddie Mac, the company had begun to loosen lending standards and buy riskier sub-prime loans. It was a practice that later blew up and contributed to the current foreclosure crisis.

In his investigation, Falcon concluded that the board of directors on which Emanuel sat was so pliant that Freddie Mac's managers easily were able to massage company ledgers. They manipulated bookkeeping to smooth out volatility, perpetuating Freddie Mac's industry reputation as "Steady Freddie," a reliable producer of earnings growth. Wall Street liked what it saw, Freddie Mac's stock value soared and top executives collected their bonuses.

Another focus of Freddie during Emanuel's day—and one that played to his skill set—was a stepped-up effort to combat congressional demands for more regulation.

During a September 2000 board meeting—midway through Emanuel's 14-month term—Freddie Mac lobbyist R. Mitchell Delk laid out a strategy titled "Political Risk Management" aimed at influencing lawmakers and blunting pressure in Congress for more regulation. Through Delk's initiative, Freddie Mac sponsored more than 80 fundraisers that raised at least $1.7 million for congressional candidates despite a federal law that bans corporations from direct political activity.

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