Daniel Mudd, Richard Syron charged with fraud in Fannie/Freddie case
According to the lawsuit, Fannie and Freddie misrepresented their exposure to subprime loans in reports, speeches and congressional testimony.
Fannie told investors in 2007 that it had roughly $4.8 billion worth of subprime loans on its books, or just 0.2 percent of its portfolio. That same year, Mudd told two congressional panels that Fannie's subprime loans represented didn't exceed 2.5 percent of its business.
The SEC says Fannie actually had about $43 billion worth of products targeted to borrowers with weak credit, or 11 percent of its holdings.
Freddie told investors in late 2006 that it held between $2 billion and $6 billion of subprime mortgages on its books. And Syron, in a 2007 speech, said Freddie had "basically no subprime exposure," according to the suit.
The SEC says its holdings were actually closer to $141 billion, or 10 percent of its portfolio in 2006, and $244 billion, or 14 percent, by 2008.
Syron also authorized especially risky mortgages for borrowers without proof of income or assets as early as 2004, the suit alleges, "despite contrary advice" from Freddie's credit-risk experts. He rejected their advice, "in part due to his desire to improve Freddie Mac's market share."
Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default and then sell them to investors around the world. The two own or guarantee about half of U.S. mortgages, or nearly 31 million loans.
During the financial crisis, the two firms verged on collapse. The Bush administration seized control of them in September 2008.
So far, the companies have cost taxpayers more than $150 billion — the largest bailout of the financial crisis. They could cost up to $259 billion, according to their government regulator, the Federal Housing Finance Administration.
Mudd was paid more than $10 million in salary and bonuses in 2007, according to company statements. He was fired from Fannie after the government took over. He's now the chief executive of the New York hedge fund Fortress Investment Group.
Syron made more than $18 million in 2007, according to company statements. His compensation increased $4 million from 2006 because of bonuses he received — part of them for encouraging risky subprime lending, according to company filings. It's not clear what portion of the bonuses was for his efforts to promote subprime lending.
Syron resigned from Freddie in 2008. He's now an adjunct professor and trustee at Boston College.
The other executives charged were Fannie's Enrico Dallavecchia, 50, a former chief risk officer, and Thomas Lund, 53, a former executive vice president; and Freddie's Patricia Cook, 58, a former executive vice president and chief business officer, and Donald Bisenius, 53, a former senior vice president.
Lund's lawyer, Michael Levy, said in a statement that Lund "did not mislead anyone." Lawyers for the other defendants declined to comment Friday.
Based on the outcomes of similar cases, the lawsuit might not yield much in penalties against the former executives.
In July, Citigroup paid just $75 million to settle similar civil charges with the SEC. Its chief financial officer and head of investor relations were accused of failing to disclose more than $50 billion worth of potential losses from subprime mortgages. The two executives charged paid $100,000 and $80,000 in civil penalties.
Fines against executives charged in SEC civil cases can reach up to $150,000 per violation. SEC Chairman Mary Schapiro has asked Congress to raise the limit to $1 million.
The SEC has brought other cases related to the financial crisis since it began a broad investigation into the actions of Wall Street banks and other financial firms about three years ago.
Goldman Sachs & Co., for example, agreed last year to pay $550 million to settle charges of misleading buyers of a complex mortgage investment. JPMorgan Chase & Co. resolved similar charges in June and paid $153.6 million.
Citigroup Inc. agreed to pay $285 million to settle similar charges, though that settlement was recently struck down by a federal judge in New York City.
Most cases, however, didn't involve charges against prominent top executives.
An exception was Angelo Mozilo, the co-founder and CEO of failed mortgage lender Countrywide Financial Corp. He agreed to a $67.5 million settlement with the SEC in October 2010 to avoid trial on civil fraud and insider trading charges that he profited from doling out risky mortgages while misleading investors about the risks.
Associated Press writers Marcy Gordon in Washington and Larry Neumeister in New York contributed to this report.
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