Government Claims Well-Compensated Executives At Fannie and Freddie Committed “Fraud,” But Consequences Prove Toothless

(Graphic from the Alter Group)

Executives at two giants of the US mortgage industry were fingered by the federal government as perpetrators of fraud in one of the few cases ever to come out of the 2008 financial meltdown despite its consequences nearly bringing down the global economy. And in a political twist, President Obama and his potential election challenger are indirectly involved in the fallout.

The former CEO’s at Fannie Mae and Freddie Mac, the public-private mortgage behemoths  that were at the heart of the housing bubble and financial dealings that brought on the ’08 market catastrophe, were officially accused of fraud by government investigators with the Securities and Exchange Commission.

While Daniel Mudd and Richard Syron are “two of the highest ranking figures to face accusations in the wake of the financial crisis,” those accusations are being handled as a civil case, not a criminal one. This has been the government’s standard operating procedure the few times it has sought accountability of individuals involved in the 2008 crisis. Not a single criminal case has emerged from the ashes of Wall Street’s implosion more than three years ago.

The SEC formally charges that executives at Fannie and Freddie vastly understated the amount of toxic subprime mortgages it held, possibly by as much as hundreds of billions of dollars. This would have masked the serious financial difficulty the massive companies were facing, eventually having to be saved by a government bailout to prevent their collapse.

Though government agents disparage Mudd and Syron for having “mislead” the public, Wall Street and investors, a “non-prosecution agreement” with the two quasi-public organizations will ensure no criminal consequences will result from the investigation and subsequent civil lawsuits.

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.

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” Robert Khuzami, director of the SEC’s enforcement division, said 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.”

The collapse of Fannie and Freddie amid an avalanche of toxic mortgages and foreclosures  was one of the most iconic stories of the 2008 meltdown, nearly leading to the insolvency of the two companies before the federal government stepped in with a bailout totaling over $150 billion.

While other victims of the financial crisis and bailout recipients have stabilized to various stages of recovery, Fannie and Freddie are still on virtual life-support. To date, $153 billion in government money has been poured into the two companies to ensure their survival. The government projects over $200 billion in additional bailout funds may be needed as fallout from the housing crisis drags on.

When the dust settles, the federal bailout of Fannie Mae and Freddie Mac will be the most expensive government rescue of the financial crisis — it already stands at $153 billion and counting.

Even as the Obama administration unveiled its plan for reforming the firms, experts agree taxpayer losses are going to continue to climb, no matter what Congress eventually decides to do with them.

The Federal Housing Finance Agency, the government body that oversees the two mortgage giants, has estimated that losses through 2013 will require Treasury to pour another $68 billion to $210 billion into the firms on top of the money already used to prop-up the firms and the housing market.

“Regardless of what they do, even if they were to change their status tomorrow, none of that will change the losses that will be coming due on their existing book of business,” said Guy Cecala, publisher of Inside Mortgage Finance, an industry trade publication.

It;s only fair to question whether the decision to target executives at two institutions so closely linked to the idea of government bailouts is political in nature.

Though having received the largest publicly acknowledged government bailout during the crisis, Fannie and Freddie are by no means the lead villains in the acts that led to the housing collapse or the wide financial panic.

Just this summer, the federal government announced that they would pursue billions of dollars in damages from a host of private banks for “financial misrepresentation” of their subprime mortgage holdings in 2008. Not a single executive from bailed out firms like Citibank or Bank of America have faced civil or criminal charges for their roles in the meltdown.

Regardless of motivation, the current zeal with which the government is pursuing litigation against the ex-CEO’s of Fannie and Freddie is a startling juxtaposition with previous treatment of the executive suit at the two firms. Before facing civil charges of fraud, Mudd, Syron and their colleagues at Fannie and Freddie were receiving tens of millions of dollars in gold-plated compensation — after the companies were bailed out by taxpayers.

The Obama administration approved more than $34 million in compensation packages for the top six Fannie and Freddie  executives between the time of the bailout and early 2011. The bonuses were flowing even as the performance of the mortgage giants continued to erode and more government money was being pumped into them eah quarter in a bid to retain solvency.

Over the last two years, the Obama administration has approved a whopping $34.4 million in compensation to the top six executives of the financially troubled Fannie Mae and Freddie Mac mortgage giants while lacking basic protections to ensure such compensation is warranted, a federal watchdog found.

“The need for effectiveness, integrity, and transparency in FHFA’s programs and operations cannot be overstated,” said Inspector General Steve Linick, a former Justice Department prosecutor confirmed by Senate last year to watch over federal housing programs. “Fannie Mae and Freddie Mac have received almost $154 billion in taxpayer funding to support the still-fragile housing market. In addition, they own or guarantee about $5.4 trillion in residential mortgage obligations.”

An examination of recent filings from the companies reveals that more than $100 million of government bailout money earmarked for the survival of Fannie and Freddie went to pay the salaries and bonuses for a handful of top executives. The two current CEO’s were even scheduled to get a half-million dollar raise this year.

Mortgage finance giants Fannie Mae and Freddie Mac received the biggest federal bailout of the financial crisis. And nearly $100 million of those tax dollars went to lucrative pay packages for top executives, filings show.

The top five executives at Fannie Mae received $33.3 million in 2009 and 2010, while the top five at Freddie Mac received $28.1 million. And each company has set pay targets of as much as $17 million for its top managers for 2011.

That’s a total of $95.4 million, which will essentially be coming from taxpayers, who have been keeping the mortgage finance giants alive with regular quarterly cash infusions since the Federal Home Finance Agency (FHFA) took control of the companies in September 2008.

Fannie CEO Michael Williams and Freddie CEO Charles Halderman, each received about $5.5 million in pay for last year, and they could receive more when their final deferred compensation for 2010 is set. All the executives receive a significant portion of their pay in the year or years after they earn it.

The CEOs’ pay targets for 2011 are about $6 million a piece, though Halderman might not get much of that money since he’s announced plans to leave Freddie sometime in 2012. He must still be at the company in order to receive the deferred compensation. His base pay for 2011 is $900,000, with most of the rest of his compensation coming in deferred payments.

While the ongoing travails of Fannie and Freddie are a throbbing thorn in the side of President Obama, a potential presidential rival faces his own equally embarrassing connection to the two entities that are the target of much of the public anger over government bailouts.

Former Speaker of the House Newt Gingrich, now a leading contender for the Republican presidential nomination, is facing questions over past lobbying ties to Freddie Mac and whether his actions contributed to the internal failures that perpetuated the subprime mortgage crisis.

Records show that Gingrich received as much as $1.8 million in fees from Freddie Mac in a period that began in 1999 and lasted until 2008.  The Speaker admits that he provided “strategic advice,” and former officials at the company confirm that Gingrich helped lobby for policies meant to ensure the success of President George W. Bush’s policy of expanding homeownership through more lenient mortgage practices.

Gingrich has since become a vocal critic of President Obama’s fiscal policies and has come to oppose the bailout of Freddie and Fannie, as well as blame advocacy groups and Democrats for fomenting policy that led to the proliferation of subprime mortgages.  That he was once a well-paid “counsel” for Freddie Mac has proven a challenge for his presidential campaign.

Newt Gingrich made between $1.6 million and $1.8 million in consulting fees from two contracts with mortgage company Freddie Mac, according to two people familiar with the arrangement.

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Gingrich’s business relationship with Freddie Mac spanned a period of eight years. When asked at the debate what he did to earn a $300,000 payment in 2006, the former speaker said he “offered them advice on precisely what they didn’t do,” and warned the company that its lending practices were “insane.” Former Freddie Mac executives who worked with Gingrich dispute that account.

During that period, Gingrich consulted with Freddie Mac executives on a program to expand home ownership, an idea Delk said he pitched to President George W. Bush’s White House.

In defense of his record, Gingrich has said he was merely a “historian” hired to advise Freddie, and that he was simply a “private citizen engaged in business” — not a lobbyist.

And although Gingrich and his allies have  insisted that he voiced concern with Freddie’s mortgage strategy, Mother Jones magazine has uncovered a September 2008 interview in which he claimed to be “perfectly happy” with the company’s practices “as long as they weren’t failing.” Of course, soon after he said this, they very nearly did.

Not only did Gingrich consult for Freddie, he also stood fast by its quasi-governmental status, which is anathema to many conservatives in Washington and beyond. Ex-Freddie employees told Bloomberg they didn’t remember Gingrich ever voicing opposition to the company’s business model or strategy. In September 2008, as both Freddie Mac and Fannie Mae teetered on the brink of collapse (they were eventually taken over by the federal government), Gingrich said he had no plans to question Freddie’s business model. “I was perfectly happy to not push the issue as long as they weren’t failing,” he explained at the time.

“The need for effectiveness, integrity, and transparency in FHFA’s programs and operations cannot be overstated,” said Inspector General Steve Linick, a former Justice Department prosecutor confirmed by Senate last year to watch over federal housing programs. “Fannie Mae and Freddie Mac have received almost $154 billion in taxpayer funding to support the still-fragile housing market. In addition, they own or guarantee about $5.4 trillion in residential mortgage obligations.”