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The Financial Executives Who Really Deserve To Go To Jail Over The Mortgage Crisis

Updated on March 5, 2012

I've previously written about how the government is finally catching up with the Fannie Mae and Freddie Mac executives that contributed to the financial crisis. Of all the characters in the saga of the mortgage meltdown these guys take the prize for the most criminal. People talk about how bank executives deserve to go to jail for their role in feeding the housing bubble but when the government looks for the smoking gun the most likely source is the government sponsored entities.

The Case Against Fannie And Freddie Executives

Recently another Barron's article appeared - this time written by Jonathan Laing - reviewing some of the revelations from the SEC securities fraud complaints against various Fannie Mae and Freddie Mac executives. The gist of the article is that the Fannie and Freddie executives took on huge risks and hid the truth in an effort to make their companies look more profitable so as to increase their compensation. Here are some of the examples of their devious deeds:

  • They guaranteed huge quantities of subprime and Alt-A mortgages, which carried huge fees - or so the fees seemed at the time. In reality they weren't high enough for the risks taken.
  • These executives attempt to defend their risk taking in the name of meeting affordable housing goals.
  • In order to take on these risks the executives purposely mislabeled mortgages and lowered credit standards.
  • They then lied about how much risk they had taken on. Fannie Mae only admitted to carrying $306 billion of Alt-A exposure when in reality they had $647 billion while Freddie Mac claimed their subprime exposure was a mere $2 -6 billion but really had $244 billion of exposure. Freddie Mac also reported only $188 billion of alt-A exposure when the real number was $541 billion.
  • The executives also hid their gains and losses from interest rate hedges.
  • As if all this wasn't enough they also fudged their accounting in order to goose their bonuses.

The sad thing is that the likely outcome of this whole mess is that the defendants will get to sign consent decrees, which will carry "no finding of guilt, innocence or liability". As such any penalties will be paid by Fannie and Freddie's errors and omissions policy instead of the guilty (presumably) parties.

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