Six former executives at Fannie Mae and Freddie Mac have been charged by the Securities and Exchange Commission with lying about the two housing entities’ exposure to high-risk subprime mortgage loans just ahead of the 2008 financial crisis.
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The SEC is alleging that as the U.S. housing bubble was losing air between 2006 and 2008, these top executives – three at Fannie Mae and three at Freddie Mac – knowingly allowed the two publicly traded entities to make false statements regarding their holdings of loans made to borrowers with bad credit.
They lied, according to the SEC’s complaint, in order to mislead investors and prop up Fannie and Freddie’s stock price. At the time, both entities were backed by the U.S. government but their stock was traded in public markets.
Both Fannie and Freddie were taken over by the government in 2008 as they teetered on the verge on insolvency.
Charged in civil suits by the SEC from Fannie Mae was former CEO Daniel H. Mudd, former chief risk officer Enrico Dallavecchia, and former executive vice president Thomas A. Lund.
The former Freddie Mac executives include former Chairman and CEO Richard F. Syron, former executive vice president and chief business officer Patricia L. Cook, and former executive vice president Donald J. Bisenius.
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“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was.”
According to the SEC, Fannie Mae and Freddie Mac have agreed to cooperate with the investigation into the former executives in exchange for immunity from prosecution.
Perhaps sensitive to criticism of their decision not to go after the entities themselves, the SEC said “unique circumstances” -- namely the cost to taxpayers if Fannie and Freddie had to defend themselves against SEC charges – led to the agreement.
“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, in a statement. “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.”
Both lawsuits allege the former executives allowed the firms to “materially misstate their holdings of subprime mortgage loans” in SEC filings, public statements, investor calls, and media interviews.
The SEC is alleging that Fannie Mae reported that its 2006 exposure totaled about $4.8 billion when the number was really closer to $43 billion.
Freddie Mac executives, according to the complaint, told investors in 2006 that the entity had “basically no subprime exposure” when the figure actually stood $141 billion, which by 2008 had grown to $244 billion.
Both Fannie and Freddie declined to comment Friday. Attorneys for the executives charged by the SEC couldn’t immediately be reached for comment.