SEC Suit vs GSE Execs Is About False Statements, Fraud

Yes, we know: The usual liars and assclowns have latched onto the SEC litigation against the F&F execs for their the own biased reasons, as if lying executives somehow vindicates their own lies about the causes of the crisis. The suit is about statements made after housing peaked in both price and sales volume and was already heading south.

Let’s take a look at the SEC suit, and note what is being litigated, and what it might mean for other banking and mortgage execs.

This is a relatively straightforward case of securities fraud. The defendants knowingly misled investors about the volumes of risky mortgages that their companies were purchasing as the housing boom turned to bust. The complaint names former Freddie Mac execs CEO Richard Syron and former Fannie Mae CEO Daniel Mudd as defendants. Four other high-ranking former GSE execs are also named.*

Proving these charges is a simple matter of comparing the actual holdings against what the execs said to investors in public statements.

Note that CNBC erroneously tweeted/reported that the government was effectively suing itself. This is incorrect, as the Non-Prosecution Agreements with Fannie & Freddie prevent that.

What does the SEC actually allege?

Misleading and false disclosures to investors about GSE exposure to subprime and Alt-A as of the end of 2006, in 2007 and 2008.

As of year end 2006, Fannie Mae execs were reporting its exposure to subprime loans as just 0.2% — about $4.8 billion. This omitted borrowers with weaker credit histories — more than $43 billion in mortgages.

As of 2007, Fannie Mae executives disclosed that 11% of the total book of business was Alt-A mortgages. The reality was 18% of the actual holdings were Alt A. That is larger by some 63.6%.

Both Freddie and Fannie execs also misled investors regarding their subprime exposure, claiming it to be substantially smaller than it really was. Freddie Mac disclosed they held $6 billion, while Fannie Mae disclosed $8 billion. The actual holdings, according to the SEC, were magnitudes greater at $250 billion and $110 billion respectively.

Here is SEC enforcement chief Robert Khuzami:

“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. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.” (emphasis added)

What makes this case so very interesting is that last sentence: It raises the possibility of very similar analyses for the execs at AIG, Citigroup, Lehman Bros, Bear Stearns, Merrill Lynch, Indy Mac, Bank of America, Countrywide and even Goldman Sachs.

Let’s hope this was not a one off . . .

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Previously:
10 Things You Don’t Know (or were misinformed) About the GS Case (April 23rd, 2010)

Examining the big lie: How the facts of the economic crisis stack up (November 26th, 2011)

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* Named to the suit were: Former CEO Daniel H. Mudd, Chief Risk Officer Enrico Dallavecchia, and EVP Single Family Mortgage business, Thomas A. Lund; former Freddie Mac executives  Chairman/CEO Richard F. Syron, EVP/Chief Business Officer Patricia L. Cook, and EVP Single Family Guarantee business Donald J. Bisenius