Friday, December 16, 2011

Ex-Freddie, Fannie Chiefs sued by SEC over disclosure; solution ultra transparency

A Bloomberg article reports that the SEC is suing the former chiefs of Freddie Mac and Fannie Mae for understating by billions of dollars their exposures to sub-prime mortgages.

The takeaway from this lawsuit is the need for all financial firms to provide ultra transparency.  By disclosing on an on-going basis their current asset, liability and off-balance sheet exposure details, financial firms eliminate the possibility of misleading the market about the firm's risk.

Daniel Mudd, the former chief executive officer of Fannie Mae, and Richard Syron, ex-CEO of Freddie Mac, were sued by the U.S. Securities and Exchange Commission for understating by hundreds of billions of dollars the subprime loans held by the firms. 
The lawsuits filed today in Manhattan federal court were followed by an SEC statement that it had entered into non- prosecution agreements with each company.... 
In the lawsuits, the SEC said Syron, Mudd and other executives understated exposure to subprime mortgage loans. 
From 2007 to 2008, Freddie Mac executives said the company’s exposure was between $2 billion and $6 billion when it was actually as high as $244 billion, according to one SEC complaint. 
From 2006 to 2008, Washington-based Fannie Mae executives said the firm’s exposure to subprime mortgage and reduced documentation loans was about $4.8 billion when it was almost 10 times greater, according to the regulator.

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” Robert Khuzami, direct of the SEC’s enforcement division, said today in a statement. “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.”...
Mudd, now CEO of Fortress Investment Group LLC (FIG), was ousted when Fannie Mae and Freddie Mac were seized by regulators in September 2008. In a statement today, he said the federal government and investors were aware of “every piece of material data about loans held by Fannie Mae.” 
“The government reviewed and approved the company’s disclosures during my tenure, and through the present,” Mudd said in the statement. “Now it appears that the government has negotiated a deal to hold the government, and government- appointed executives who have signed the same disclosures since my departure, blameless -- so that it can sue individuals it fired years ago.”
This blog has previously discussed the issue of 'regulatory approval' when it came to banks disclosing a) their loans from the Fed and b) regulatory forbearance.  In both cases, the regulator appears to be telling the bank that it is okay to mislead the market with their disclosures.

What good would regulatory forbearance be if banks actually had to reserve for what are obviously impaired assets?  The whole exercise is based on the idea of misrepresenting the true status of the bank balance sheet.

Regular readers know that this is one of the readers that your humble blogger advocates ultra transparency. It removes most, if not all, of the ways that banks and their regulators can mislead the market using disclosure.

No comments: