Former Fannie Mae and Freddie Mac CEOs charged with fraud 

 

Two former CEOs at mortgage giants Fannie Mae and Freddie Mac yesterday 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 noted that 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 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 US 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 now in private practice in Manhattan. 

Robert Mintz, a white-collar defence 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. "The SEC's theory and approach are fatally flawed." 

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 (£3bn) 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 (£28bn) 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 (£90bn), or 10 percent of its portfolio in 2006, and $244 billion (£157bn), or 14 percent, by 2008. 

Syron also authorized especially risky mortgages for borrowers without proof of income or assets as early as 2004, the suit alleges, "despite contrary advice" from Freddie's credit-risk experts. He rejected their advice, "in part due to his desire to improve Freddie Mac's market share." 

Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default and then sell them to investors around the world. The two own or guarantee about half of US mortgages, or nearly 31 million loans. 

During the financial crisis, the two firms verged on collapse. The Bush administration seized control of them in September 2008. 

So far, the companies have cost taxpayers more than $150 billion (£97bn) — the largest bailout of the financial crisis. They could cost up to $259 billion (£167bn), according to their government regulator, the Federal Housing Finance Administration. 

Mudd was paid more than $10 million (£6.5m) in salary and bonuses in 2007, according to company statements. He was fired from Fannie after the government took over. He's now the chief executive of the New York hedge fund Fortress Investment Group. 

Syron made more than $18 million (£11.6m) in 2007, according to company statements. His compensation increased $4 million from 2006 because of bonuses he received — part of them for encouraging risky subprime lending, according to company filings. It's not clear what portion of the bonuses was for his efforts to promote subprime lending. 

Syron resigned from Freddie in 2008. He's now an adjunct professor and trustee at Boston College. 

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, Michael Levy, said in a statement that Lund "did not mislead anyone." Lawyers for the other defendants declined to comment yesterday. 

Based on the outcomes of similar cases, the lawsuit might not yield much in penalties against the former executives. 

In July, Citigroup paid just $75 million (£48m)  to settle similar civil charges with the SEC. Its chief financial officer and head of investor relations were accused of failing to disclose more than $50 billion worth of potential losses from subprime mortgages. The two executives charged paid $100,000 (£65,000) and $80,000 (£50,000) in civil penalties. 

Fines against executives charged in SEC civil cases can reach up to $150,000 per violation. SEC Chairman Mary Schapiro has asked Congress to raise the limit to $1 million. 

The SEC has brought other cases related to the financial crisis since it began a broad investigation into the actions of Wall Street banks and other financial firms about three years ago. 

Goldman Sachs & Co., for example, agreed last year to pay $550 million to settle charges of misleading buyers of a complex mortgage investment. JPMorgan Chase & Co. resolved similar charges in June and paid $153.6 million (£100m). 

Citigroup Inc. agreed to pay $285 million (£183m) to settle similar charges, though that settlement was recently struck down by a federal judge in New York City. 

Most cases, however, didn't involve charges against prominent top executives. 

An exception was Angelo Mozilo, the co-founder and CEO of failed mortgage lender Countrywide Financial Corp. He agreed to a $67.5 million (£43m) settlement with the SEC in October 2010 to avoid trial on civil fraud and insider trading charges that he profited from doling out risky mortgages while misleading investors about the risks. 

AP

Voices
A Russian hunter at the Medved bear-hunting lodge in Siberia
Save the tigerWildlife charities turn to those who kill animals to help save them
News
Davis says: 'My career has been about filling a niche - there were fewer short actors and fewer roles – but now I'm being offered all kinds of things'
PeopleWarwick Davis on Ricky Gervais, Harry Potter and his perfect role
News
i100
Sport
Frank Lampard will pass Billy Wright and equal Bobby Charton’s caps tally of 106 caps against
sportFormer Chelsea midfielder in Etihad stopgap before New York contract
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
The first film introduced Daniel Radcliffe to our screens, pictured here as he prepares to board the train to Hogwarts for the first time.
booksHow reading Harry Potter helps children grow up to be gay-friendly
Arts and Entertainment
A scene from Aladdin is performed at the Tony Awards in New York in June
theatreBrit producer Lythgoe makes kids' musical comedy a Los Angeles hit
Sport
Usain Bolt of Jamaica smiles and shakes hands with a competitor after Jamaica won their first heat in the men's 4x100m relay
sport
News
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

(Senior) IT Support Engineer - 1st-3rd Line Support

£40000 per annum: Ashdown Group: A successful IT service provider that has bee...

Wind Farm Civil Design Engineer

£55000 - £65000 Per Annum: The Green Recruitment Company: The Green Recruitmen...

Principal Marine Mechanical Engineer

£60000 - £70000 Per Annum: The Green Recruitment Company: The Green Recruitmen...

Principle Geotechnical Engineer

£55000 - £65000 Per Annum: The Green Recruitment Company: The Green Recruitmen...

Day In a Page

Save the Tiger: Meet the hunters tasked with protecting Russia's rare Amur tiger

Hunters protect Russia's rare Amur tiger

In an unusual move, wildlife charities have enlisted those who kill animals to help save them. Oliver Poole travels to Siberia to investigate
Transfers: How has your club fared in summer sales?

How has your club fared in summer sales?

Who have bagged the bargain buys and who have landed the giant turkeys
Warwick Davis: The British actor on Ricky Gervais, how the Harry Potter set became his office, and why he'd like to play a spy

'I'm a realist; I know how hard this business is'

Warwick Davis on Ricky Gervais, Harry Potter and his perfect role
The best swim shorts for men: Bag yourself the perfect pair and make a splash this summer

The best swim shorts for men

Bag yourself the perfect pair and make a splash this summer
Has Ukip’s Glastonbury branch really been possessed by the devil?

Has Ukip’s Glastonbury branch really been possessed by the devil?

Meet the couple blamed for bringing Lucifer into local politics
Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup