FBI Launches Probe of Fannie, Freddie

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Former housing execs face grilling as SEC sues over risky mortgages

Federal investigators want to know whether executives at mortgage finance giants Fannie Mae and Freddie Mac misled investors and the public about risky mortgages in the lead-up to the 2008 financial crisis.

High-ranking sources with the Department of Justice told The Daily that the FBI and other federal authorities have launched investigations into the matter. The development comes as the Securities and Exchange Commission filed suit yesterday against six former top executives at Fannie and Freddie.

The suits represent the most aggressive moves to date by federal regulators against financial executives at the heart of the housing market meltdown.

The civil suits claim execs at Fannie and Freddie — both now under federal control and propped up by $169 billion in taxpayer money — deliberately downplayed the danger and the volume of subprime mortgage holdings in the years leading up to the credit crisis.

The companies now have limited protection from further legal challenges under a special agreement with the SEC, but that deal leaves open the possibility of future criminal charges.

The 59-page complaint against three former Fannie Mae executives — onetime CEO Daniel Mudd, Chief Risk Officer Enrico Dallavecchia, and former executive vice president Thomas Lund — alleges mortgage loans the company described as “made to borrowers with weaker credit histories” were less than one-tenth of the true numbers.

Behind the scenes, the government-sponsored companies painted a different picture, the SEC says, and acknowledged high-risk loans made up a far larger percentage of the businesses.

The timing of the executives’ alleged statements in media interviews, in SEC filings and in calls to investors — all made between 2006 and 2008 — is a critical component of the case because they came even as major cracks spread through financial markets in 2008.

“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 risks on the company’s books,” said Robert Khuzami, director of the SEC’s Enforcement Division.

The SEC filed a separate suit yesterday in the same New York City federal court against three onetime Freddie Mac executives — former CEO Richard Syron, former executive vice president Patricia Cook, and former executive vice president Donald Bisenius.

That suit claims the executives underreported the percentage of high-risk loans in one of its portfolios, while saying publicly that the business had “basically no subprime exposure.”

But unbeknown to investors, by the end of 2006, Freddie’s so-called “Single Family” business was exposed to $141 billion in loans the company called “subprime” or “subprime like,” according to the SEC. The number ballooned to $244 billion by June 2008.

The misleading disclosures were made as the company was trying to increase its market share “through increased purchases of subprime” and other high-risk loans, giving investors “false comfort,” the agency said.

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” Khuzami said.

Current executives at Fannie and Freddie signed non-prosecution agreements with the SEC in which they accepted responsibility — but not liability — for its conduct and agreed not to dispute the lawsuits. The companies will not pay any fines.

The agreement is limited to allegations in the current lawsuits, and does not protect the former executives or others from being the target of prosecution from other agencies. The suits seek financial penalties against all six executives.

Mudd said yesterday, “The SEC is wrong, and I look forward to a court where fairness and reason — not politics — is the standard for justice.”

After the government took over the companies in 2008, Mudd moved on to his current position as chief executive of private equity giant Fortress Investment Group. Syron is now a director for biotech company Genzyme Corp. The SEC seeks to bar all the defendants from serving as directors of public companies.

Syron’s attorney, Thomas Green, called the case “without merit” and argued that the definition of the term subprime had “no uniform definition in the market.”

Lund’s attorney said yesterday that his client “did not mislead anyone.”

“During a period of unprecedented disruption in the housing market, nobody worked more diligently or honestly to serve the best interests of both investors and homeowners,” attorney Michael Levy said in a statement.

Lawyers for other executives named in the suits did not respond to requests for comment.

Andrew.Strickler@thedaily.com
Josh.Bernstein@thedaily.com

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