S.E.C. Sues Executives Over 2008 Housing Bubble Loans
According to The Wall Street Journal, Friday's civil lawsuits "rank among the highest-profile crisis-related cases the government has brought. They are also the first cases against the top executives at Fannie and Freddie before their 2008 government takeover, which has cost taxpayers $151 billion."
The lawsuits' outcomes may be contingent on one word: "subprime."
From The New York Times:
- Success for the S.E.C. in the Fannie and Freddie case will largely hinge on the meaning of the word subprime, which the government itself has never fully defined. While the term often refers to borrowers with low credit scores, Fannie and Freddie decided to classify loans as prime or subprime based on the lender type, not the borrower’s credit score. A Wall Street bank, for instance, was usually considered a prime lender, despite extending subprime loans.
- But the government’s complaint contends that this kind of disclosure masked risk. Loans not considered subprime often defaulted at higher rates than those classified as subprime.
The S.E.C.'s enforcement chief, Robert S. Khuzami, spoke candidly about the agency's actions against the ex-executives from the two biggest U.S. mortgage lenders.
“All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors,” said Khuzami to The New York Times. “Investors were robbed of the opportunity to make informed investment decisions.”
From The Financial Times:
- To date, Mr Khuzami said, the SEC has filed 38 actions against 87 defendants, including 45 who are chief executives and chief financial officers. The SEC has sued the former chief executives of New Century, IndyMac and Countrywide. Some of the executives have settled while others are fighting the allegations.
According to Business Week, the executives' lawyers did to wish to comment, but in 2007 the Fannie Mac and Freddie Mac executives had each said that their involvement with subprime loans had been "minimal, less than 2.5 percent of our book," and had not "been heavily involved in subprime all along."
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