OOPs! Where does this go?

Daniel Mudd, the former CEO of Fannie Mae got a Wells notice from the SEC on Friday. I have been waiting years for this to happen. There is a good reason this action is so late in coming. This case could open the door for culpability of the Federal Government in the collapse of the US mortgage agencies.

The Wells notice is a very significant ratchet up of this story. Prosecution is not assured, but a big investigation is certain.

Mudd, who is now the CEO of buyout firm Fortress Investment Group, commented on the bad news from the SEC in predictable fashion. He denied everything: (Bloomberg)

“I could not disagree more with this turn of events. The disclosures and procedures that are the subject of the SEC investigation were accurate and complete. These disclosures were previewed by federal regulators, and have been issued in the same form since the company went into government conservatorship.”

I have always believed that Mudd is dirty. He had ample foreknowledge that the wheels were coming off at Fannie (and the entire mortgage market). If he argues that he did not, he will just look dumb. When he spoke to Bloomberg he was reading from a script prepared by big-shot lawyers. Again his words:

These disclosures were previewed by federal regulators.

Mudd and his lawyers are spot on with this comment. It is a shot across the bow of the SEC. If Mudd had used real words in his statement he would have said:

“We prepared statements and sent them to our regulator, OFHEO. They reviewed them and agreed with them. Fannie has letters from OFHEO that says we were clean. Don’t blame me for the blowup. Blame our regulator!”

OFHEO (Office Of Federal Housing Enterprise Oversight) was run by James Lockhart. I don’t think he is responsible for the collapse of the GSE’s. But I have always been convinced that he covered up the problems from the day he took over as the head of OFHEO. OFHEO did fail as a regulator. There can be no doubt about that at this point.

I hope the SEC pushes this hard. I hope there is a trial. If there is, I am betting that Mudd takes a walk. His reporting/disclosure was approved by Lockhart. That legal conclusion (should it come) would be very damaging to the government. It opens the door for a ton of lawsuits.

-Lockhart is now Vice Chair at Wilbur Ross’s holding company. He is advising on investments in distressed mortgages. Fitting.

-Don’t read this as an argument to buy the very distressed securities of Fannie and Freddie that are now trading in the “Pinks”. If there were to be some legal action I think it would be to the benefit of those poor suckers who bought and held Agency preferred and common prior to the conservatorship in the fall of 2008. That said, the Fannie Pref is up 400% in just the past few months. Go figure…..