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 . . .

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)



* 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

Category: Credit, Legal

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “SEC Suit vs GSE Execs Is About False Statements, Fraud”

  1. mathman says:

    With a Congress in bed with Wall Street, hamstrung regulatory agencies and a right-wing/pro-corporate Supreme court – do these suits have any legs?

    Here’s what the two-party politcal system is capable of going to bat for their vested interest groups via lobbying firms:
    GOP Threaten to Harm the Economy If Obama Won’t Embrace Tar Sands Pipeline
    As Congress attempts to finish its 2011 work, the House leadership continues to push hard to speed up the permitting process for the Keystone XL pipeline. Today Speaker of the House John Boehner (R-OH) threatened to add a Keystone provision to a two-month extension of the payroll tax cut, scheduled to expire on December 31. Boehner told reporters:

    These rumors that are floating around here about a two-month extension, I’ll just say this: If that bill comes over to us, we will make changes to it, and I will guarantee you that the Keystone pipeline will be in there when it goes back to the United States Senate.”

  2. DeDude says:

    I would love to see that the same type of cases soon get raised against all those other execs the companies you mention at the end. Then it would be like with the Iraq war, that the administration moved slowly but finally did the right thing. The next 6 month will say it all (and we will know before the election).

  3. Moss says:

    Fraud is all about intent. Their statements and those of many many more financial executives was intended to deceive. I recall at the time that one of the GSE’d had a buyout offer at $60 ish, this was quickly rescinded. Not for a lower price mind you but totally abandoned. One wonders what they knew.

  4. Bill Wilson says:

    It’s one thing to bring lawsuits against Fannie and Freddy. They have unlimited government support, so I don’t think these lawsuits threaten there ability to function.

    The other big banks are a different story.

  5. carleric says:

    Lets hope the population of Marion, ILL sees an uptick but you can bet Barney Frank and his ilk will be pulling everything string they can to protect Freddie and Fannie. I would like to see the lobbying dollars detailed just for grins but unlikely


    BR: Why do you think ANYONE will try to protect the GSEs now? The pipeline of cash they spread around — from Newt’s 1.8M to Barney’s boyfriend’s job — is over. Their protectorate is no more . . .

  6. Petey Wheatstraw says:

    I don’t think the public mind groups Fannie and Freddie in with the likes of AIG, Citigroup, et al. For a good number of people, the GSEs are lumped in with the nebulous “Big Evil Government” boogeyman, and that’s all they need to know.

    “Note that CNBC erroneously tweeted/reported that the government was effectively suing itself.”

    Misinformation is a powerful tool.

  7. GeorgeBurnsWasRight says:

    I think this is a test case to see if it’s still possible to get a conviction on a relatively straight forward financial fraud case. It will be interesting to see if the defense attorneys can manage to confuse the jury so much that a conviction is impossible, or appeals can go on until the defendants die of old age.

    I’ll be pleasantly surprised if these defendants go to jail. I’ll be completely amazed if the bank execs are successfully prosecuted and jailed.

  8. gkm says:

    If you leave a BMW in the street, engine running, keys in it, what are the chances that someone of low moral character will come along and make off with it? Now was that a systemic issue or not? Now imagine the GSE’s are only the keys in this allegory….

  9. Lyle says:

    Note that this is a civil case there is no possibility of jail time. That would have to be prosecuted by the Justice department. Rather the penalties are fines bans from being a director and officer of a public company, revocation of securities licenses and the like.
    Anyway given how full the prisons are why should the taxpayers pay for keeping these folks in prison at 100k per year? Being a civil case the burden of proof is far less in a preponderance of the evidence, not beyond a reasonable doubt. Its also not clear that a jury will be involved at all. (It depends on the enforcement track the SEC chooses)

  10. eliz says:

    @ Lyle – spot on

    “The SEC is seeking financial penalties, disgorgement of ill-gotten gains with interest, permanent injunctive relief and officer and director bars against Mudd, Dallavecchia, Lund, Syron, Cook, and Bisenius. ”

    If this action makes paupers of these folks and their heirs, that would be a good start. But I highly doubt that will happen.

    While it is not just a “show” in the legal sense, in the bigger picture that is all this is – as the punishment (if there is any), cannot come close to the impact of the “crimes.”

  11. machinehead says:

    I’d like to suggest that the SPONSORS of these misbegotten GSE behemoths — namely, 535 KongressKlowns who chartered them, extended a $2 billion federal credit line, allowed them to hire an army of lobbyists, accepted their political gifts, and failed to exercise the most rudimentary supervision of their Ponzi-like expansion — be named as accomplices in the civil suit.

    Stripping 535 negligent nonfeasors of their multi-million dollar pensions would provide a bracing lesson in ‘accountability.’

  12. Liquidity Trader says:

    Hey Ritz!

    Speaking of assclowns, did you ever get an apology from Rick Ungar regarding the Goldman Case? He trashed you here.

    You were right and he was wrong on nearly everything about the subject.

  13. He now blogs for Forbes, and some of his stuff is pretty good.

    My issue with him — aside from the fact he was dead wrong — was his arguments were so thin. His argument about Mark Cuban, a pending case that predated Khozuemi, was intellectually dishonest. I also did not care for how he mischaracterized my arguments. The case he actually tried to make — hearsay testimony claimed to be in possession of CNBC (?!?) was pretty laughable. After Goldman’s attorney’s reviewed, the firm wrote the biggest check in the history of SEC. So much for CNBC’s memo exonerating Goldie.

    The comment stream at TrueSlant was polluted with nonsense as well; For the record, I did pass the bar, I did practice law, and I did warn about the housing meltown and market crash.

  14. A says:

    Well, it is an election year.

    It was quite interesting how Obama distanced himself from the subject during the recent 60 Minutes interview. If his admin is able to press charges against the Wall Street companies, that might just win some voter appeal.

    What would really rock the nation is to put Hank Paulson under the same magnifying glass.
    Too big to jail ?

  15. Joe Friday says:

    Edward Pinto is currently a resident fellow at the American Enterprise Institute, and previously served as executive vice president and chief credit officer for Fannie Mae in the 1980s. During his appearance on the PBS Newshour, he stated:

    Fannie and Freddie were the biggest players in the secondary market. They controlled a substantial portion. Another substantial portion was controlled by private mortgage-backed security issuers. But they had a very large participation in the marketplace and were buying large quantities.


    What part of creating a secondary market for mortgages do these RightWingers not comprehend ? It’s like complaining that every cement truck that the police stop and inspect is either carrying cement or there’s evidence it recently did so.

  16. Joe Friday says:


    …you can bet Barney Frank and his ilk will be pulling everything string they can to protect Freddie and Fannie.

    And exactly HOW was “Frank and his ilk” protectors of Fannie & Freddie when he and they were in the Congressional Minority ? They didn’t have the votes to change the brand of toilet paper in the Congressional bathrooms.

  17. louis says:

    How’s that HAMP working out for ya? Maybe they will get to that after the decade long court cases play out.

  18. DuchessGateau says:

    The CEOs may be guilty, but they’re scapegoats. How many politicians from both parties used the GSEs to line their pockets? Who was influencing the entire process in order to “save the system”? (Probably Barney Frank, which I think counts as a political achievement)… Isn’t there truth to the argument that there would have been a collapse to the entire U.S. financial system if honest accounting were used, whether at the GSEs or bankrupt banks? This is still the problem, both in the U.S. and Europe.

    Barry is right as usual. If the money stream from the GSEs has dried up, they have lost their political protection. Barney Frank is retiring, and somebody decided to fix blame somewhere, because it’s all about to unravel. The corruption at the GSEs has been going on for so many years and so many have profited that it would take an army to investigate. A quick internet search comes up with untouchables like Bill Clinton and Rahm Emmanuel (just ask Blagojevich). I’m sure Gingrich isn’t the only Republican. And who “outed” him? Bravo!

    I’m left wondering if Barney Frank could have kept the entire scheme going like a perpetual motion machine if he were able to live forever. Did the money dry up simply because he’s retiring?
    “According to a complaint later filed by the SEC, Freddie Mac misreported profits by billions of dollars in order to deceive investors between the years 2000 and 2002.”

    “Clinton’s going-away gift to Emanuel was a seat on the quasi-governmental Freddie Mac board, which paid him $231,655 in director’s fees in 2001 and $31,060 in 2000.”

    “Freddie Mac was accused of illegally using corporate resources between 2000 and 2003 for 85 fundraisers that collected $1.7 million for candidates,” an Associated Press story from April 18, 2006 said. “Much of the fundraising benefited members of the House Financial Services Committee.”

  19. Futuredome says:

    lol, the GSE’s are irrelevant. Literally. You either get that or you don’t. They were the last holdouts from the Wall Street con game and then the Wall Street money machine came home to roost.

    Their “corruption” was no different than the corruption in the financial sector or capital owners globally. You people refuse to get it. It ALL starts with the capital owners. They control the financial sector who controls the government through the financial sector.

    “I’m left wondering if Barney Frank could have kept the entire scheme going like a perpetual motion machine if he were able to live forever. Did the money dry up simply because he’s retiring? ”

    Who cares. That scheme pailed compared to the financials and their capital owners. Either you get that or you don’t.

  20. Frilton Miedman says:

    Let’s see if I understand this…We’re going to potentially claw back “ill gotten gains” from FRE/FNM exec’s, while BAC, Citi, WSF, GS, MS and the other TBTF executives that accounted for the bulk of “ill gotten gains” get away Scott-free?

    The effective tax rate for these executives is 11%, meanwhile We’re yet again confronted with threats of government shut-downs because we don’t have the money to give tax cuts to the middle class?

    I miss anything here?

  21. flocktard says:

    Frilton, I agree with you 100%. This is SEC pandering to the GOp to get funding- pardon me for being a cynical bastard, but again, the GSEs were at the end of the sewer pipe, and the people who sent what flowed through it should be in chains by now.

    Just saw “Inside Job” for the first time, generally available on demand for free on your cable network. Nice job, and a reminder of how all of these crooks and these phony “economists” (is there really such a thing) promote their agendas.

    Nice to know Romney appointed Glen Bunning as his chief economic advisor- like Konrad Adenauer hiring Albert Speer.

  22. Frilton Miedman says:

    On taxes, the 1950′s were an economic boom while the top marginal rate was 90%, in the 90′s Clinton had reversed the deficit while creating 24 million jobs while raising taxes to the top.

    I’m not making an empirical claim that higher taxes are economically beneficial in and of themselves, but to disclaim the sadistically erroneous notion that the opposite extreme is good …and to make economically suicidal decisions to cut spending that will demote us to third world status as a result.

    The whole debate is bullshit…if we’re going to give out tax breaks and corporate welfare under the premise of “job creation”, we should be giving out tax breaks in DIRECT PROPORTION to the jobs created, nothing less.

  23. MOIDALIZE says:

    Barry, taking the SEC’s allegations as true, where would that put Fanny and Freddie in terms of the percentage of subprime loans issued during the bubble? Would you still consider them an insignificant contributor to the crash?


    BR: Its consistent with the data shown here.

    As I have consistently stated since 2008, the GSEs jumped in late as Wall St took market share away. By the time OFHEO granted them permission to enter the subprime space — permission they sought in pursuit of profits, not because Congress told them — the RRE market had peaked and was reversing.

    Note also: I would not call them “insignificant contributors” — just on par with AIG, Bear Stearns, Bank of America, Countrywide, Citigroup, Lehman Bros, Merrill Lynch, etc.

  24. Rick Caird says:

    According to Sarbanes/Oxley, the statute of limitations is 5 years for security fraud. That is why they only go back to about 2006.

  25. Frilton Miedman says:

    “BR: Its consistent with the data shown here.

    As I have consistently stated since 2008, the GSEs jumped in late as Wall St took market share away.”


    The exact reason for my first comment – bribed politicians looking for sacrificial lambs instead of the wolves that ate the lambs.

    Meanwhile, the Dick Fulds out there are set for life…what about those “ill gotten gains”?

  26. Ridge Runner says:

    “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 . . .”


    The rescission files from the investigations of MI claims should be a gold mine for the plaintiffs in such actions, if they can get access to them. In particular, see the sections entitled “Skin in the game” and “ABS Goal Misalignment with Investor Interests” in the comment letter at

    The table of links to all the comment letters, some of which (especially from the MI’s that were active during the period) provide many illuminating details of mortgage activity in the past decade – is here:

  27. janchup says:

    But, but didn’t Obama declare on 60 Minutes that no laws were broken?

  28. Jim67545 says:

    A special sort of punishment should be met out to those who “steal” from the public. Mandatory 10 years in jail plus whatever the statute would call for? I don’t care if it is Medicare fraud or whatever and I would define “steal” quite broadly. Or we could adopt sheria law and cut off a hand 0r stone them.

    In NM they just sent one minor politician to jail for 10 yeas for running up a few thousand in personal gas and snacks on a state credit card. Way to go. Unfortunately, it’s not applied elsewhere either in NM or wherever.
    - – - – -
    On F&F, the problem is that to securitize mortgages in today’s environment requires the implied, or stated, guarantee of the USA. Otherwise, nobody would buy these MBS and/or certainly not at anywhere near today’s mortgage rates.

    So, the solution is to do away with F&F? So, maybe we should let Lehman, a resurected Countrywide or some of the other “experienced” packagers assemble pools of mortgages to which THEY would attach the US government guarantee? Sounds safe to me, since these private mortgage originators have proven so trustworthy in the past. Or rely on banks that will only originate short term fixed or ARM mortgages (for asset/liability reasons)?

    Sounds like a swell solution.

  29. Sophocles says:

    So again we here this has nothing to do with the financial crisis. Sure, it had nothing to do with it. We mustn’t allow any fact, no matter how damning or how completely substantiated with evidence, let us think Fannie and Freddie had anything whatsoever, however tangential or remote, to do with the financial crisis. No sirree. [/sarcasm]

    Sorry, you last remnant defenders of the GSEs, that tired and threadworn mantra no longer works and no one not hopelessly wedded to the Democratic Party and leftist ideology gives any credence to it anymore. This must have been how it was when the Confederacy was defeated — today’s version of the devoted Confederate nostalgist, the big government lovers, can never accept reality on this score.

  30. Jim67545 says:

    Sophocles: (if still listening)
    The first decision to be made is USA guarantee (implied or otherwise) or not.
    If not then rates will be much higher (after all only the borrower’s financial strength will backstop the loan) and 30 year fixed rates are very probably history. This will slice away a significant segment of those who would currently qualify as homeowners. This would eliminate refinancings and affect relocations. If more conservative underwriting also occurs, such as 25 or 30% downpayments, then the impact would be even more profound. The backlog of foreclosed and shadow inventory would be more slowly absorbed. The recovery of the “troubled” housing sector would be delayed.
    If the answer is “yes, let’s continue the USA guarantee” then the question is who is authorized to pledge that guarantee. In my opinion it cannot be private concerns such as mortgage brokers, for numerous reasons. I don’t even trust a private third party similar to a PMI company. Collusion will certainly arise. That leaves a governmental entity. The FHA is a train wreck as their high LTV lending comes home to roost. They lack the necessary expertise and will be occupied for the next decade. That leaves the GSEs.
    I think that the GSEs should be combined (why have two?) and de-privatized. The “private” publically traded nature of the GSEs was a big source of the problems that occurred. Get rid of the rediculous salaries on top. This too will stop the political funding nonesense. Use the huge expertise there to put together a prudent, highly disciplined, originator/packager of guaranteed MBS.
    I don’t see any choice despite our distain for what the GSEs WERE even though this blog correctly puts most of the sub-prime blame on the mortgage bankers, not the GSEs.

  31. ews says:

    Always a big fan of the fairly levelheaded analysis here. However, that first paragraph was defensive, ideological rubbish, more concerned about keeping score than seeing TBP, which is an incredibly annoying trait of so many on the left today.

    I mean: “The suit is about statements made after housing peaked in both price and sales volume and was already heading south” may be true but obscures the more important fact that the statements were also made BEFORE the financial crisis, and, ergo, contributed to that crisis. (Also see Rick Caird’s comment).


    BR: What statements were made by GSE execs before the crisis — or before they asked OFHEO for and received permission to buy SubPrime in late 2005 ?

    Please back that up with some specifics . . .

  32. ews says:

    I’m just going by your own post that said the SEC accused GSEs of “Misleading and false disclosures to investors about GSE exposure to subprime and Alt-A as of the end of 2006.” That’s before the financial crisis.


    BR: Its not before the peak in housing.

    My pushback is against the meme that GSEs were forced by Congress to give loans to people who didnt qualify. We know that is not what occurred or why.

    As far as I can tell, F&F jumping late into Subprime in 2006-08 did not cause the massive increase in private label securitization of a subprime, or the 40 to 1 leverage by banks, or the trillions in derivatives written by AIG, nor the no doc loans, etc.