Fannie Mae and HSBC Fallout
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Two bits of news reported last week are worth a mention.
Fannie Mae announced on Tuesday that it would not be paying
over $44.4 million in bonuses to its former and current executives. The bonuses
were part of an incentive program that was based on performance targets such
as earnings growth.
Fannie Mae has been embroiled in an accounting
scandal for over two years because of accounting irregularities for the
period 2001 to 2004. The Securities and Exchange Commission ordered Fannie to
restate its earnings for that entire period and claims have been made that the
irregularities may have, in part, emerged from efforts to inflate growth and
thus maximize bonuses.
The corporation's board of directors decided to pull the bonuses after
reviewing Fannie's restated results for the three years ending December
31, 2003. 18 former and current officers are affected by this reversal in fortunes.
An additional 21 current and former executives who were part of the performance
program for the three years ending on December 21 are also affected. A spokesperson
said that no decisions about bonuses for programs that ended in 2005 and 2006
have been made.
In December the Office of Federal Housing Enterprise Oversight (OFHEO)
which regulates Fannie Mae and its competitor Freddie Mac announced that it
was filing civil charges against three former Fannie executives who had been
forced out at the height of the scandal but with generous, very generous, "parachutes."
OFHEO's Office of the General Counsel accused the three of submitting six years
of misleading and inaccurate accounting statements and inaccurate capital reports
that enabled them to grow Fannie Mae in an unsafe and unsound manner.
In other news there is new fall-out from a gloomy announcement the world's
third largest bank made earlier this month. U.K. based HSBC Holdings which,
through its U.S. subsidiary HSBC Finance Corporation (formerly
Household International) has been among the most aggressive lenders in the U.S.
subprime market. HSBC informed industry analysts about two weeks ago that it
would be writing off 20 percent more bad-debt than it had previously forecast.
According to MarketWatch, HSBC Holdings was not the first big lender to raise
"warning flags about bad-performing debt portfolios," but it was
the largest. Others named by MarketWatch include Washington Mutual, IndyMac
Bankcorp, and New Century Financial. HSBC said that it would be taking an overall
charge of $10.56 billion because the bank had failed to predict how many borrowers
would fall behind on mortgage payments as their interest rates increased and
along with them their monthly payments.
On Thursday another shoe dropped as two of the highest executives of
the U.S. based portion of the firm left the group. The two, Bobby Mehta, chief
executive of HSBC North America Holdings and HSBC Finance Corporation and Sandy
Derickson, president and CEO of the company's U.S. banking operations have been
replaced by others from the American subsidiary. The corporation announced that
it would be taking a more hands-on approach to management of its U.S. operations
and appointed the holding company's finance director as non-executive chairman
of HSBC Finance.
According to MarketWatch, the 2003 acquisition of consumer lender Household
(most Americans probably remember it by an even earlier name - HFC) has
been one of the main causes of the poor performance of the British company's
stock. The acquisition contributed to earnings growth but the volatility which
came along with the U.S. loan portfolio "has acted as a drag on the shares."
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