SEC Charges Fannie, Freddie Executives with Fraud

Econintersect: Friday (December 16) the SEC filed civil suits charging six former executives of the GSEs (government sponsored enterprises) Fannie Mae and Freddie Mac with securities fraud. The six charged are Daniel H. Mudd, former chief executive of Fannie Mae; Richard F. Syron, who was chairman and chief executive at Freddie Mac; Enrico Dallavecchia, Fannie’s former chief risk officer; Thomas A. Lund, former executive vice president of Fannie’s single-family mortgage business; Patricia L. Cook, former chief business officer of Freddie Mac; and Donald J. Bisenius, former executive vice president for Freddie’s single-family guarantee business. The fraud charges center on allegations that the six undertook to mislead the investing public about the exposure of the companies to subprime loans during the mortgage meltdown.

A joint report from the Washington Post and Bloomberg says:

The executives are among the most prominent individuals the Securities and Exchange Commission has accused of wrongdoing related to the financial crisis, and the legal action comes at a time when the SEC and the Justice Department are facing criticism for not doing more to hold executives accountable.

The SEC accused the companies of understating their vulnerability to the housing downturn by concealing the amount of risky mortgages on their books, robbing investors of the chance to make informed decisions about whether to stake their money on the firms.

In 2007, when Fannie Mae began reporting its exposure to subprime loans, or loans “made to borrowers with weaker credit histories,” it disclosed less than one-tenth of the total volume that met that description, the government said.

The suit seeks to have fines imposed and to reclaim “ill-gotten gains” as well as bar the six from ever again serving as officers of public companies.

The attorney’s for one of the defendants issued a statement Friday which has caught Econintersect’s attention. From the Washington Post:

Dallavecchia’s attorneys also responded to the charges with a statement Friday. “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,” Kelly Kramer and Laura Miller said. “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.”

This prompts the following editorial note: If the claim of Dallavecchia’s attorney is valid, and there is no reason to doubt it, why are the Fannie and Freddie executives the only ones that have been charged by the SEC?  Is it because the SEC sees a way to proclaim it is being diligent in pursuing fraud by going after operators who may not have been the worst offenders with regard to misrepresentation of mortgage risk simply because they are easy targets with no corporate deep pockets and private company exposures to corporate prosecutions to create a much better funded defense? Fannie and Freddie are now owned by the government and the government will not sue itself.

If executives at one of the TBTF (too big to fail) banks were to be charged, the deep pockets of the corporation would be brought into play to protect the company’s interests and the prosecution would be much more challenging. So are we seeing a case where it is not the size of the frauds committed by individuals which determine who will be prosecuted but the weakness (or lack) of corporate backing that pertains?

Will any top executives of any of the major banks ever face the charges that these former Fannie and Freddie bigwigs are seeing? Or is this going to be a case of selective enforcement by grabbing the guys going 15 mph over the speed limit in the right hand lane (because it’s easy to flag them over to the shoulder) while letting all those going 15-30 mph over in the other lanes continue on down the road unimpeded?

Econintersect suggests it is the misfortune of these six that Fannie and Freddie were not fully privatized before the crisis. Then they could hold the same “Get Out of Jail Free” cards as all the other bank executives.

Source: Washington Post with Bloomberg