SEC moves toward charging top execs at Fannie Mae, Freddie Mac
The Securities and Exchange Commission is moving toward charging former and current Fannie Mae and Freddie Mac executives for violations related to the financial crisis, setting up a clash with the housing regulator that oversees the companies, according to sources familiar with the matter.
The Washington Post
WASHINGTON — The Securities and Exchange Commission is moving toward charging former and current Fannie Mae and Freddie Mac executives for violations related to the financial crisis, setting up a clash with the housing regulator that oversees the companies, according to sources familiar with the matter.
The SEC, responsible for enforcing securities laws, is alleging that at least four senior executives failed to provide necessary information to investors about the companies' mortgage holdings as the U.S. housing market collapsed.
But the agency that most closely regulates Fannie and Freddie, the Federal Housing Finance Agency, disagrees with that assessment, according to sources familiar with the matter.
Officials of the housing-finance agency think Fannie and Freddie's financial disclosures, which agency staff members had reviewed before the documents were released to the public, were sufficient, the sources said.
One source added that the housing-finance agency has sent a letter to the SEC opposing the filing of charges.
A spokesman for the agency declined to comment.
Over the past eight weeks, the SEC sent notices to the executives saying they may face civil charges. The SEC has not yet formally filed such charges and ultimately may choose not to.
The agency alleged that executives at both companies misled investors about their exposure to dangerous mortgage products, such as subprime loans, sources familiar with the matter said.
The executives include former Fannie Chief Executive Daniel Mudd, former Freddie Chief Executive Richard Syron, former Freddie Chief Financial Officer Anthony Piszel and current Freddie executive Donald Bisenius, who recently announced that he would leave the company after he received his notice.
The allegations are slightly different for the companies. One of the chief allegations against Fannie executives is that it characterized mortgage loans as "prime" — meaning high-quality — when they should have been classified in a more risky category of loans.
Meanwhile, Freddie executives are accused of not fully warning investors about the risks associated with subprime loans.
Fannie and Freddie, on the verge of the collapse as the financial markets imploded in the fall of 2008, were seized by the federal government.
Now owned by taxpayers, they have needed $150 billion in aid to stay afloat.
The SEC case may also add to a brouhaha on Capitol Hill over federal expenditures by Fannie and Freddie for former executives. The companies are spending millions of dollars to cover the legal costs of a different set of former executives who face private class-action lawsuits.
Federal Housing Finance Agency officials say the former executives are legally entitled to that coverage.
The SEC case will further add to those taxpayer bills because the executives facing allegations are also indemnified.
In the years relevant to the SEC case, Fannie and Freddie routinely submitted their financial disclosures to the predecessor of the housing-finance agency before releasing them to the public.
One person familiar with the matter pointed out that the SEC itself reviewed Freddie's disclosures in 2008.
A lawyer for Syron said Freddie made accurate disclosures. Lawyers for Bisenius and Piszel could not be reached.
Approval by a federal regulator is not a defense for a misleading securities filing, said Donald Langevoort, a Georgetown University law professor. It could make it harder for the SEC to prove fraud, but the SEC can file other charges, he said.
Last week, the Federal Deposit Insurance Corp. filed a civil lawsuit against former WaMu CEO Kerry Killinger, ex-Chief Operating Officer Stephen Rotella and David Schneider, who headed WaMu's home-loans division.
The FDIC also named Killinger's and Rotella's wives in the suit filed in federal court in Seattle.
The FDIC said the three executives pushed for expansion of WaMu's risky lending even though they knew or should have known its loan standards were inadequate.
The Seattle thrift, with $307 billion in assets, collapsed in September 2008.
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