Good news of aggressive enforcement action by the SEC, as reported by Associated Press:
WASHINGTON (AP) – 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….
According to the lawsuit, Fannie told investors in 2007 that it had roughly $4.8 billion worth of subprime loans on its books. The SEC says that Fannie actually had about $43 billion worth of products targeted to borrowers with weak credit.
Freddie said about 11% of its single-family loans were subprime in 2007. The SEC says it was closer to about 18%.
“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.”
Investors had every reason to believe that Fannie and Freddie executives were telling them the truth about the financial health of the two companies, which eventually were forced into bankruptcy with investors getting wiped out. However, the SEC court filings, available here, suggest that the agency has pretty strong evidence that they did not tell the truth, and in fact were actively deceptive in order to keep the stock prices, and their own compensation, artificially high.
The goal of the civil fraud charges is to force the six executives to surrender bonuses and stock options they received in that time frame and to pay penalties on top of those returned profits. Syron’s compensation, for example, “grew from approximately $14.7 million in 2006 to $18.3 million in 2007,” according to the SEC filing.
Despite the glee it inspires among conservatives, the case offers no evidence that Fannie and Freddie played a major role in causing the subsequent financial meltdown. To the contrary, the story told in the SEC filings confirms the narrative laid out in previous independent investigations by the Federal Reserve and the Financial Crisis Inquiry Commission: The two “government-sponsored enterprises,” or GSEs, moved into the subprime market late in the game, and did so because they were losing market share to more aggressive private subprime mortgage companies. They allowed themselves to get sucked into the bubble, and if the SEC is correct they lied about it, but they did not cause the bubble in the first place.
For example, in its discussion of Freddie Mac’s role, the SEC writes:
“By 2005, the Freddie Mac and Fannie Mae combined share of the market for mortgage securitizations had fallen to approximately 42 percent from a high of nearly 60 percent in 2000. Within that shrinking GSE share of the market, Freddie Mac also had been steadily losing market share to Fannie Mae. Freddie Mac responded to this loss of market share by broadening its credit risk parameters to purchase and guarantee increasingly risky mortgages in its Single Family guarantee portfolio between approximately 2004 and 2007.”
In a similar case settled earlier, the SEC filed civil fraud charges against Angelo Mozilo, the former CEO and founder of Countrywide Financial. Mozilo paid $22.5 million to settle the case and forfeited another $45 million he was to otherwise receive.