**Note: We are republishing each of the 22 challenges from Catherine’s fiscal cliff article – one a week. Helps to digest them bit by bit!**
Challenge #1 Disclosure
By Catherine Austin Fitts
We do not have reliable financial information about federal financial operations which provides government officials or citizens with the data they need to easily understand federal operations, to make informed choices or to hold their legislative representatives and their fellow taxpayers accountable.
The current government budgets and financial statements reflect “overt” operations. They exclude a significant amount of classified or illegal government activities – “covert operations” – whether paid for out of classified intelligence agency and military budgets or the “black budget.”
The financial statements that reflect “overt operations” have not been able to pass independent audits for almost two decades (as required by law) and report that trillions of dollars have gone missing in transactions that are “undocumentable.” This has included years when such “undocumentable” transactions exceeded total annual tax receipts.
In addition, it is nearly impossible to track federal expenditures by place using federal reporting structures; and thus it is very difficult for communities to hold their congressional representatives accountable. Some information about local sources and uses of federal funds can be indirectly gleaned from financials prepared by state and local officials (see: Comprehensive Annual Financial Reports). But it is impossible to get a comprehensive picture from these or any government issued financial reports. Perhaps by design.
As a government official, I struggled with the problems of trying to understand the origination of government mortgage credit by place without basic financial information. If reliable government budgets and financial statements were easily accessible to citizens by county or congressional district, mortgage fraud would never have become as bad as it did during the last few decades.
“When I joined the Bush Administration in 1989 as Assistant Secretary of Housing, I read the budget for the Federal Housing Administration (FHA). It described a $300 billion portfolio of mortgage insurance in force with about $50-100 billion a year of annual originations. I asked the person responsible for the comptroller function to direct me to the place in the budget where it explained how much we were making and losing. I was told there was no such place. I asked where the financial statements were. I was told that the accountants had them, that they reported to a different Assistant Secretary and that I was not allowed to speak with them. The Government Accounting Office (GAO) had audited our financial statements several years ago. We could not afford an outside auditor, let alone every year. Besides, we operated on a cash basis. The Office of Management and Budget (OMB) would never permit accrual statements.
After months of working with a variety of parties at HUD, OMB and in the Administration, and with much support from GAO, the accounting group was moved over to my area and legislation was introduced and passed that required a comptroller for the FHA Funds, a chief financial officer for the department, and a legal requirement for annual audited financial statements and actuarial statements.
When we got access to our financial information, it turned out that we were losing $11 million a day in the single-family fund, the Mutual Mortgage Insurance Fund, and more in the multifamily and special risk fund called the General Insurance Fund. What is more, I discovered that we had never tracked our financial results on a place-based basis. In other words, ten regional and eighty field offices had no idea how they were doing. So we put together crude place-based cash flows.
What we found was simply astonishing. First, the national data on which the portfolio was based turned out to be the irrelevant product of averaging. A look at all ten regions and eighty field offices showed that no one part of the portfolio fit the image depicted by the national averages. Our vision of our business had been substantially distorted by the way in which the data had been presented. Second, it turned out that over 100% of our losses were generated in two regions.
The first was headquartered in Texas, and included Oklahoma, Louisiana and Arkansas. We discovered that the Texas region had lost over $2 billion the year before. They had no idea. The second was headquartered in Colorado. What the numbers showed was that S&L fraud and HUD fraud were perpetrated by the same networks and in the same places involving the use of federal credit.”
Catherine Austin Fitts, “The Myth of the Rule of Law”
How does Congress make choices or educate and align constituencies without reliable, independent feedback regarding their financial and economic decisions? It’s difficult – and in turn many decisions are made based on inaccurate information.
Continue Reading “Beyond the Fiscal Cliff”
