The Securities and Exchange Commission has brought civil fraud
charges against six former top executives at Fannie Mae and Freddie Mac,
saying they misled the government and taxpayers about risky subprime
mortgages the mortgage giants held during the housing bust.
Those
charged include the agencies’ two former CEOs, Fannie’s Daniel Mudd and
Freddie’s Richard Syron. They are the highest-profile individuals to be
charged in connection with the 2008 financial crisis.
Mudd,
53, and Syron, 68, led the mortgage giants when the housing bubble
burst in late 2006 and 2007. The four other top executives also worked
for the companies during that time.
The case was filed in federal court in New York City.
In
a statement released through his attorney, Mudd said the lawsuit
“should never have been brought” and said the government reviewed and
approved all of the company’s financial disclosures.
“Every piece
of material data about loans held by Fannie Mae was known to the United
States government to the investing public,” Mudd said. “The SEC is
wrong, and I look forward to a court where fairness and reason — not
politics — is the standard for justice.”
Syron’s lawyer couldn’t be immediately reached for comment.
According
to the lawsuit, Fannie told investors in 2007 that it had roughly $4.8
billion worth of subprime loans on its books, or just 0.2 percent of its
portfolio. The SEC says that Fannie actually had about $43 billion
worth of products targeted to borrowers with weak credit, or 11 percent
of its holdings.
Mudd told a congressional panel in March 2007
that Fannie’s subprime business represented less than “2 percent of our
book.” He also said the company held subprime mortgages “very
carefully.”
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Freddie
told investors in 2006 that it held between $2 billion and $6 billion
of subprime mortgages on its books. The SEC says its holdings were
actually closer to $141 billion, or 10 percent of its portfolio in 2006,
and $244 billion, or 14 percent, by 2008.
In a May 2007 speech in New York, he said Freddie had “basically no subprime exposure,” according to the suit.
“Fannie Mae
and Freddie Mac executives told the world that their subprime exposure
was substantially smaller than it really was,” said Robert Khuzami,
SEC’s enforcement director. “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.”
Fannie and Freddie own or guarantee about half of U.S.
mortgages, or nearly 31 million loans. The Bush administration seized
control of the mortgage giants in September 2008.
So far, the
companies have cost taxpayers almost $150 billion — the largest bailout
of the financial crisis. They could cost up to $259 billion, according
to its government regulator, the Federal Housing Finance Administration.
The
other executives charged were Fannie’s Enrico Dallavecchia, 50, a
former chief risk officer, and Thomas Lund, 53, a former executive vice
president; and Freddie’s Patricia Cook, 58, a former executive vice
president and chief business officer, and Donald Bisenius, 53, a former
senior vice president.
Lund’s lawyer, Thomas Levy, said in a
statement that Lund “did not mislead anyone.” Lawyers for the other
defendants declined to comment Friday morning.
