Former CEOs Charged
WASHINGTON (AP) – Two former CEOs at mortgage giants Fannie Mae and Freddie Mac on Friday became the highest-profile individuals to be charged in connection with the 2008 financial crisis.
In a lawsuit filed in New York, the Securities and Exchange Commission brought civil fraud charges against six former executives at the two firms, including former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron.
The executives were accused of understating the level of high-risk subprime mortgages that Fannie and Freddie held just before the housing bubble burst.
“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.
Khuzami said huge losses on their subprime loans eventually pushed the two companies to the brink of failure and forced the government to take them over.
The charges brought Friday follow widespread criticism of federal authorities for not holding top executives accountable for the recklessness that triggered the 2008 crisis.
Before the SEC announced the charges, it reached an agreement not to charge Fannie and Freddie. The companies, which the government took over in 2008, also agreed to cooperate with the SEC in the cases against the former executives.
The Justice Department began investigating the two firms three years ago. In August, Freddie said Justice informed the company that its probe had ended.
Many legal experts say they don’t expect the six executives to face criminal charges.
“If the U.S. attorney’s office was going to be bringing charges, they would have brought it simultaneously with the civil case,” said Christopher Morvillo, a former federal prosecutor in Manhattan.
Robert Mintz, a white-collar defense lawyer, says he doubts any top Wall Street executives will face criminal charges for actions that hastened the financial crisis, given how much time has passed.
Mudd, 53, and Syron, 68, led the mortgage giants in 2007, when home prices began to collapse. The four other top executives also worked for the companies during that time.
In a statement from his attorney, Mudd said the government reviewed and approved all the company’s financial disclosures.
“Every piece of material data about loans held by Fannie Mae was known to the United States government and 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 lawyers said the term “subprime had no uniform definition in the market” at that time.
“There was no shortage of meaningful disclosures, all of which permitted the reader to assess the degree of risk in Freddie Mac’s” portfolio, the lawyers said in a statement.
According to the lawsuit, Fannie and Freddie misrepresented their exposure to subprime loans in reports, speeches and congressional testimony.
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. That same year, Mudd told two congressional panels that Fannie’s subprime loans represented didn’t exceed 2.5 percent of its business.
The SEC says Fannie actually had about $43 billion worth of products targeted to borrowers with weak credit, or 11 percent of its holdings.
Freddie told investors in late 2006 that it held between $2 billion and $6 billion of subprime mortgages on its books. And Syron, in a 2007 speech, said Freddie had “basically no subprime exposure,” according to the suit.
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.