As the housing market deteriorated in April 2007, Fannie Mae Chief Executive Officer Daniel Mudd reported to Congress on his company’s health. The firm’s exposure to subprime loans, he told lawmakers, “remains minimal, less than 2.5 per cent of our book.”
Within 18 months, US regulators seized the government- sponsored mortgage firm and its smaller sibling, Freddie Mac, after losses on soured loans pushed them to the brink of insolvency. The two firms have drawn more than $150 billion in life support from the Treasury since then.
Mudd’s statements to Congress are being scrutinized as part of a Securities and Exchange Commission probe, according to a person briefed on the matter. Regulators may be examining what Mudd knew about the loans and how he defined subprime when he testified before the House Financial Services Committee.
The questions are part of a larger investigation into whether Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, told investors enough about the risky loans they loaded into their portfolios as the credit crisis loomed, according to two other people with direct knowledge of the investigation.
The SEC has already sent so-called Wells notices — warnings that the staff intends to pursue a civil enforcement action — to Mudd and at least three other former executives of the firms. If claims are filed, the probe could become one of the widest to emerge from the financial crisis.
The investigation echoes the agency’s case against Citigroup Inc, which agreed in July to pay $75 million after the SEC accused the bank and two executives of failing to disclose $40 billion in subprime assets before losses surged.
Freddie CEO
At the same April 2007 hearing where Mudd testified, Richard Syron, who was then the CEO of Freddie Mac and has also received a Wells notice, said his firm hadn’t “been heavily involved in subprime all along.”
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Others who have acknowledged receiving Wells notices are Donald Bisenius, Freddie Mac’s former executive vice president for single-family credit guarantee, and Anthony “Buddy” Piszel, Freddie Mac’s chief financial officer from November 2006 to September 2008.
Last week, U.S. District Judge John Keenan in New York threw out a shareholder lawsuit alleging that Freddie Mac, Syron and Piszel misrepresented the firm’s investments in risky mortgage products and hid its true financial condition through “a series of partial disclosures.” Keenan said the lawsuit failed to prove intentional fraud and he dismissed the suit without prejudice, meaning others can file similar claims.