His Name is Mudd

In 2010, testifying before the Financial Crisis Inquiry Commission, former Fannie Mae CEO Daniel Mudd stated "I accept responsibility for everything that happened on my watch." He was held accountable today when the SEC filed suit against him along with former Freddie Mac CEO Richard Syron and six other former top executives at the two mortgage companies for civil fraud.

The son of former TV news anchor Roger Mudd, and a Marine decorated for his combat service in Beirut, Mudd ran Fannie Mae from 2005 to 2008 during the height of the US mortgage crisis.

Mudd is accused of substantially understating Fannie’s investments in subprime mortgages, falsely inflating the value of their portfolio and therefore misleading investors. Fannie and Freddie have already cost taxpayers over $150 million in bailouts and estimates suggest that amount may more than double before the companies are again solvent. In 2007, Fannie claimed that subprime mortgages represented less than “2% of our book” and that the firm had "basically no subprime exposure" however the SEC claims Fannie had 11% of its investments in subprime mortgages for a total of $43B.

In response to the suit, Mudd stated “The government reviewed and approved the company’s disclosures during my tenure, and through the present. 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.”

He has a point. No matter how much his deeds may mirror his name, it is highly unlikely that those that came after him or the members of our government that supported Fannie are blameless. Fannie and Freddie were created by Congress in order to encourage homeownership and make getting a home loan easier. Home ownership means spending money and spending money stimulates our economy. It is probable that misleading Wall Street about the nature of Fannie and Freddie’s portfolio risk was deemed the lesser evil when faced with the choice of admitting the industry’s fragile state and then losing investor confidence. In the end, of course, that fragility came to light anyway and the subsequent losses were that much worse.

For those of us that don’t run the country’s most powerful banks or hold positions of governmental authority, lying about portfolios in order to falsely gain investment dollars is typically punished with lengthy prison sentences and personal financial ruin. As an example, three days ago, Rick Young was sentenced to 25 years in prison and ordered to pay $13.2M in restitution to the investors in his fraudulent securities brokerage, Global One Group. Compared to the Wall Street titans behind Bank of America, Citigroup, AIG, Countrywide, Goldman Sachs, and others, the scope of Young’s crime was minor. While filing civil suit against men like Daniel Mudd is a good first step toward punishing those that were the culprits behind the TARP debacle, it is only a small one. These men need to face the same prison time and fines that any financial conman would, regardless of their political connections or impressive resumes. Hopefully Mudd is just one of many that will wind up before a judge in the next year or two and if our leaders are serious about preventing such crimes in the future, those men will face more than just a loss of reputation and a portion of the ill-gotten wealth they stole from the public. They'll find themselves behind bars. Only then will justice truly be done.