Economics, U.S. Economy

Top Fannie and Freddie officers to face the music

The SEC filed suit today against six top officers of Fannie Mae and Freddie Mac for failure to disclose the firm’s exposure to subprime and other low quality loans. The companies themselves were not charged, in part because they are now supported by the taxpayers, but the companies each agreed to “accept responsibility for its conduct and not to dispute, contest, or contradict the contents of an agreed-upon statement of facts, without admitting or denying liability.”

This is an extremely important event, because it will expose for the first time the extent to which the subprime and other risky loans that were made by Fannie and Freddie in the 1990s and 2000s were hidden from the market. These facts are important because, by 2008, before the financial crisis, Fannie and Freddie were holding or had guaranteed 12 milllion subprime or other risky loans but had not reported that fact to the markets. This made it extremely difficult for risk managers at banks, investment banks, rating agencies, and other financial institutions to understand the risks of securities backed by subprime  and other weak loans, and this was one of the major causes of the financial crisis.

As outlined fully in my dissent from the majority report of the Financial Crisis Inquiry Commission, it was the government’s housing policies that caused the financial crisis, and Fannie and Freddie—in complying with the affordable housing requirements established by Congress in 1992 and gradually increased by HUD between 1992 and 2007—were the key players in implementing these policies. The SEC disclosures in the trial to come will show beyond question that the report of the Financial Crisis Inquiry Commission, in claiming that Fannie and Freddie were only “marginal” in the financial crisis, was a politically motivated whitewash.

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