Once again, the farce of so-called SEC “prosecutions” reveals itself. Last Friday, the financial watchdog agency charged six former top executives from Fannie Mae and Freddie Mac with securities fraud for deliberately misleading the pubic about how much money they had invested in high-risk, subprime mortgages. The farce? From the SEC’s website: “Fannie Mae and Freddie Mac each entered into a Non-Prosecution Agreement with the Commission in which each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability.”
The six defendants are Richard Syron, former CEO of Freddie Mac; Daniel Mudd, ex-CEO of Fannie Mae; Enrico Dallavecchia, former chief risk officer for Fannie Mae; Thomas Lund, Fannie Mae’s former executive VP; Patricia Cook, Freddie Mac’s former executive VP; and Donald Bisenius, former senior VP at Freddie Mac.
According to the complaint, “Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” said Robert Khuzami, director of the SEC’s Enforcement Division. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books,” he added.
If the SEC’s complaint is accurate, “misstatements” is a stunningly inadequate description. For example, during an 18-month stretch ending in August 2008, Freddie Mac told investors its exposure to single-family subprime loans was $2 billion to $6 billion. The SEC alleges it was $141 billion at the end of 2006, rising to $244 billion by the middle of 2008.
Yet the defendants are unrepentant. None of the six have agreed to settle with the SEC, and some have promised to fight the charges, according to statements released by their lawyers last Friday.
Richard Syron’s attorneys claim the suit is “fatally flawed” because there is no uniform definition of sub-prime mortgage, further contending there was “no shortage of meaningful disclosures, all of which permitted the reader to assess the degree of risk in Freddie Mac’s guaranteed portfolio.”
Daniel Mudd, now chief executive of Fortress Investment Group, a major hedge fund, claimed the government “reviewed and approved the company’s disclosures during my tenure, and through the present,” he wrote. “Now it appears that the government has negotiated a deal to hold the government, and government-appointed executives who have signed the same disclosures since my departure, blameless–so that it can sue individuals it fired years ago.”
Enrico Dallavecchia’s attorneys said that “Fannie Mae’s disclosures were vetted by its lawyers and approved by its regulators. They were truthful, accurate, and far more detailed than those issued by other financial institutions. While most in the market–including senior government officials–claimed that problems with subprime loans would be ‘contained,’ Mr. Dallavecchia warned that they could infect the entire housing market,” they added.
Thomas Lund’s attorney was equally defiant. “During a period of unprecedented disruption in the housing market, nobody worked more diligently or honestly to serve the best interests of both investors and homeowners. When the truth comes out at trial, it will be abundantly clear that Mr. Lund–who did not sell a single share of Fannie Mae stock during this entire period–acted appropriately at all times.”
Why isn’t the SEC suing Fannie and Freddie directly? Because the government-sponsored enterprises (GSEs) are essentially considered wards of the government, and the agency is content to have their cooperation in the case against these former executives. Both companies were seized by the government in 2008, wiping out all shareholders in the process, even as the Treasury Department received a 79.9 percent ownership stake in the firms. Since that time the government has spent more than $150 billion to keep both firms solvent.
Adding taxpayer insult to taxpayer injury, some of those funds have been allocated to paying for costs associated with Fannie and Freddie defending themselves. $50.1 million was spent for documentation relating to securities lawsuits and government investigations, while another $57.5 has been advanced to executives and board members for legal fees for the same two categories. That information was revealed to Congress by the Federal Housing Finance Agency (FHFA) earlier this year. This week it was revealed that the FHFA is still paying legal fees associated with the case.
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