The walls have closed in over the past couple weeks on mortgage giants Fannie Mae and Freddie Mac. The SEC charged former CEOs and executives at the companies with fraud. California Attorney General Kamala Harris sued them for imformation in a wide-ranging fraud investigation. And now we learn that the FBI is investigating them:
At issue is whether Fannie and Freddie — two of the largest mortgage companies in the country, and the recipients of a major government bailout in September 2008 — misled the public and investors about the relative risk of their loans in the lead up to the financial crisis, the Daily reports. The matter has serious implications, since many allege that mortgage lenders’ enthusiasm for making loans to homeowners with shoddy credit, and banks’ penchant for using those loans as financial instruments, are among the principal reasons for the housing crash and financial crisis.
The SEC’s lawsuit probes much the same question, hitting six former executives at the two companies with charges of security fraud, and accusing them of continuing to hold onto questionable loans even after the magnitude of the risk became clear. Neither company is directly named as a defendant in the SEC’s suit.
The SEC appears to be framing that suit as a response to critics who have accused the agency of going easy on the major banks and financial institutions who played a central role in the financial meltdown, according to The New York Times.
If Fannie and Freddie are guilty of misleading investors, they deserve to pay the penalty. And yet, I do sense more enthusiasm to go after these government sponsored enterprises than to go after the private banking firms which were far more responsible for subprime. This feeds a false narrative that government somehow caused the financial crisis by forcing lending to poor people. Fannie and Freddie followed the market in subprime and did not originate it.
That said, you do need to start somewhere, and if they exhibited criminal behavior, I’m happy to see them pay the price. And of course, getting the FBI involved raises the possibility of criminal charges, whereas the SEC violations were civil.
It’s also good to know that The Daily is still in existence. But it’s a measure of their success, or lack thereof, that nobody found out about this FBI investigation until several days after initial publication.