Three former Fannie Mae and three former Freddie Mac officers have been charged with securities fraud:
Three former Fannie Mae executives – former Chief Executive Officer Daniel H. Mudd, former Chief Risk Officer Enrico Dallavecchia, and former Executive Vice President of Fannie Mae’s Single Family Mortgage business, Thomas A. Lund – were named in the SEC’s complaint filed in U.S. District Court for the Southern District of New York.
The SEC also charged three former Freddie Mac executives — former Chairman of the Board and CEO Richard F. Syron, former Executive Vice President and Chief Business Officer Patricia L. Cook, and former Executive Vice President for the Single Family Guarantee business Donald J. Bisenius — in a separate complaint filed in the same court.
“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” said Robert Khuzami, Director of the SEC’s Enforcement Division. “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.”
Unfortunately, I’m afraid this will fan the flames of the controversy surrounding the GSEs (government-sponsored enterprises).
Why hasn’t there been more discussion of whether these institutions should exist at all? I can understand the reason for the instrumentality that they represent. I can’t understand the bizarre public-private hybrid form of organization. I see no way it’s not inherently corrupt.
We need more of this. I think that Bill Black is correct in that there was a lot more fraud going on than has been prosecuted. For the GSEs in particular, this is consistent with all of my readings. The problem was not trying to increase homeownership (they should have been bragging about the number of subprimes, not hidng them), the problem was fraud that resulted in larger salaries for executives. The reason to get rid of the GSEs is because they have an implicit guarantee which distorts the market, and they have oversight directly by Congress and the executive branch, which guarantees corruption/mismanagement.
What is interesting is that only the execs at the GSEs are being prosecuted…
“for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.”
Given the extensive use of off-balance sheet accounting, derivatives that were not traded in exchanges or markets and general non-disclosures about how they were rating their tranches of loans, I think you prosecute a lot of executives from a lot of banks.
Steve
So what mortgage framework do countries without governmental or semi-governmental assistance have?
I believe that before our GSEs a mortgage was hard to get, and 10 or 15 years was the maximum term.
If you are talking to a man on the street, he might believe that he can have his cake and eat it too … that without GSEs there would still be 30 year mortgages at below 5%.
Not likely. What we should do is move from this to discussion of what other mortgage systems in the world work better … I don’t know why that always leads to Denmark.
(I think the best examination of the suits is here. It makes it seem like a PR sideshow, frankly.)
As I said in the post my problem is with the public-private hybrid nature of the GSEs rather than the function they’re performing.
The Danish system is a hybrid too, right? I’d say so, given its market mechanisms.
Do you have a wholly governmental example in mind?
I have no problem with private companies as a general principle. I have no problem with government agencies as a general principle. I have a problem with privatizing profits and socializing costs and institutions like Fannie and Freddie certainly seem to have evolved with that expectation. I don’t believe in firm resolutions from Congress for better oversight since I think regulatory capture is inherent in such an institution.