Bill Maloni's GSE Blog

Pimping the SEC Findings Could Get You Coal in Your Christmas Stockings

“You know Dasher and Dancer, Prancer and Vixen, Wallison, Pinto, the Journal, Donner and Blitzen, but do you recall their most infamous snow job of all…..….”


Before we all get buried by the holidays, I wanted to share some thoughts on last week’s SEC indictment of three Fannie and three Freddie senior officers for what the regulatory agency said was misrepresenting the nature of the subprime assets each company carried on its books.

The news brought forth the predictable hoots and hollers from Right side wing nuts, their think tank apologists, and a bundle of GOP Members of Congress and presidential candidates, everyone trying to claim that the SEC’s case description supports what they and other anti-GSE folks have been saying.

Joe Nocera--who joined Bethany McLean in writing an extremely readable and straight forward book about Fannie and Freddie and the financial crisis ("All the Devils Are Here")--challenged the SEC findings in a New York Times op-ed piece earlier this week. (See link below.)

http://www.nytimes.com/2011/12/20/opinion/nocera-an-inconvenient-truth.html

I won’t repeat what Nocera said, other than to say, “Way to go, Joe No!”

The Nocera op-ed brought a response in the Wall Street Journal from AEI’s Peter Wallison and one widely disseminated critical email from his colleague Ed Pinto, a former Fannie Mae official, who keeps reminding people of that brief career stop.

Fannie SP Security Purchases a Major Mistake

I never have wavered in my criticism of the massive Fannie and Freddie subprime purchases. The officials responsible were wrong and the strategy sucked--especially when insiders were telling senior managemen, at least at Fannie—not to buy the crap. But, they did anyway and the nation bore the consequences (as did the individuals who lost their jobs and their reputations).


In my opinion, not one of the three previous Fannie chairmen, for whom I worked, David Maxwell, Jim Johnson, or Frank Raines, would have made those purchases.

If Fannie's Dan Mudd and Freddie’s Dick Syron, instead of okaying the subprime purchases, had gone in the opposite direction, the public still would be building heroic statues of the guys. Now, they face millions in federal fines.

But, until incompetence and greed are federal crimes—as dumb as the subprime purchases were—I am not sure the “Fannie-Freddie Six” are guilty of anything but really lame judgment.

The SEC’s actions are less about the former GSEs and more about it trying to enhance its not so shining image in Washington. Certainly before 2008 and intermitently since then, the SEC cops have produced little in the way of going after anyone on Wall Street who caused the massive subprime creation and their international sales.

The Fannie and Freddie folks, demonized individually and institutionally by many in the nation’s capital (including some responsible for the very problems they accuse the mortgage giants of causing), represent politically vulnerable, friendless,low hanging fruit. The SEC thinks they easily can be harvested and will produce a needed public relations boost to its sagging enforcement reputation.

Im not a lawyer and haven't read all of the briefs in this case, but I am suggesting that the SEC has been slow in pursuing any financial services heavies. Its legal assault on the former GSE officials, represents kicking near dead horses.

That’s not to say the F&F guys are blameless, but their actions and statements no more caused the 2008 financial debacle than any other big time player.

Look carefully at what some of those who were indicted said about the SEC case.

Combining—and paraphrasing--at least three public comments, it comes out as: “Our regulator the Office of Financial Enterprise Oversight (OFHEO, now the Federal Housing Finance Agency or FHFA), knew everything that was on our books, knew the loan volume and risk profiles, but never said ‘boo’ at that time about our investor or other public comments. The SEC had the same information through our 10K filings. It, too, was silent.”

The indicted mortgage officials are suggesting that their regulators knew exactly what was on F&F's books and—at the time—received no regulatory guidance or commentary, negative or otherwise.

In the wake of the SEC findings, Peter Wallison, Ed Pinto and the Wall Street Journal haff-kaffed and harumphed that F&F were the root cause of the 2008 world financial debacle and that Fannie and Freddie had been purchasing subprime loans throughout the 1990’s.

Except all three, once again, have their “subprime” facts wrong, no matter how they try and piggyback on the SEC’s verbiage.

Wallison, Pinto and the Journal should know—especially since Ed for a time headed the Fannie business group which microscopically looked at every failed mortgage loan--if a lender poorly underwrites a mortgage applicant (which is what they and others allege Fannie did throughout the 1990’s), that loan most likely will default within three years of origination because of its shortcomings.

So, if the Righties and their friendly media were/are correct, the millions of low quality loans they claim Fannie bought--before the year 2000--should have suffered major problems and produced losses.

Except the loans didn’t.

In fact, most of that decade's books of business—all of the individual loans bought/acquired in those years—not only seldom defaulted but they continued to be healthy, quality performing mortgage assets well into the next decade. (All of the supporting data for this statement and similar ones have been published by the SEC and OFHEO/FHFA.)

Ed and Peter can’t accuse Fannie Mae of buying billions of subprime loans as far back as 20 years ago—using Ed’s very “liberal” (oops!) definition of subprime--and ignore that those 1990 loans just didn’t default in any significant manner, quite the contrary.

What did go bad, and in horrific numbers, were the F&F purchases of subprime mortgage backed securities which Wall Street created—outside the GSE underwriting systems—and sold world wide. That story has been well told and it’s a sorry mistake Fannie and Freddie share with a lot of other investors, who made equally bad business choices.

Messrs. W&P often reject federal agency studies and reports which don't agree with them. But now they think they and SEC lawyers are soul mates.

Wallison and Pinto have conflated the SEC’s finding with their GSE attacks and twisted that into an SEC endorsement of the hyperbolic views they’ve been flogging for years.

The town now is hearing lots of, “You see, we told you, didn’t we tell you?” from the AEI twins.

But—elsewhere in town--any number of recent federal reports (including a separate one from the SEC) not only have rejected W&P's primary premise, but the Fed and the President's Financial Crisis Commission rebuffed them in content and, in an unusual development, by name.

I would note and then ask, from a purely historical look, why should anyone believe Wallison and Pinto now, when they disassembled so much and misled people before? And please don’t tell me it is because their work appears in the Wall Street Journal’s editorial pages.


SEC Findings from a Legal Perspective?

I have a great deal of professional respect for Gwenn Hibbs, a former Fannie colleague, who I first met 30 years ago when we worked together at the federal Home Loan Bank Board. Gwenn has a first rate legal mind and multitudinous other talents, ranging from sketch, skit, and book writing, to playing musical instruments and training her canine pets (although not to play trombone).

In an email this week to me about the SEC indictments, Gwenn asked:


“… why none of the coverage in the '”NEWS” section re the F/F misrepresentation and fraud allegations by SEC discusses the dismissal by a federal district court of virtually the same charges (re inadequate subprime disclosure) in a shareholder derivative suit..”, as Nocera points out?

“That whole case can be found at:

http://www.leagle.com/xmlResult.aspx?page=12&xmldoc=In%20FDCO%2020100930F82.xml&docbase=CSLWAR3-2007-CURR&SizeDisp=7 .

“Maybe the reporters could be inspired to even call the SEC and ask THEM why their suit won’t be tossed out on exactly the same reasoning. Or ask them (I presume Gwenn means the media) if they don’t care because by the time it gets to the dismissal stage, it’ll be after the 2012 election.”

Go get ‘em, Gwennie!

I can’t answer that question, maybe some of the lawyers out there reading this can.

Coming Year

Health, happiness, and good holiday wishes to you all—even the wing nuts who provide so much content for my blog. You might want to acquire a coal burning stove in anticipation of Santa's presents.


Maloni, 12-22-2011