Fannie Mae headquarters in Washington
Photograph by Kevin Lamarque — Reuters
By Stephen Gandel
September 22, 2015

The penalty the U.S. government just levied on one of the highest ranking former officials of Fannie Mae wouldn’t even buy a used Volkswagen diesel Sportwagen.

On Monday afternoon, Thomas Lund settled charges brought by the Securities and Exchange Commission back in 2011 that he helped deceive shareholders of Fannie Mae in the run-up to the financial crisis. Fannie had to be rescued by the government in early September 2008, and many see the giant mortgage insurer’s misconduct as one of the main contributors to the meltdown. The suit claimed that Lund, who was the head of Fannie’s single-family division, helped hide more than $100 billion of subprime exposure from Fannie’s shareholders, allowing it to continue to back more and more risky loans.

Lund’s penalty for his role: a mere $10,000. What’s more, the penalty won’t even be considered a fine. The SEC agreed to classify the payment officially as a “gift to the U.S. government,” not an actual punishment. But the worst part is this: Lund won’t even pay the penalty. The agreement allows Fannie to make the payment for him, which it has agreed to do. And don’t forget: The government had to bail out Fannie and still controls it.

So in other words, the non-fine “gift to the U.S. government” that has been levied on the former head of Fannie’s single family division, which was the biggest source of the company’s problems, will actually be essentially paid by the government. How’s that for justice?

 

Andrew Lavender, Fannie’s former risk officer, also agreed to a $25,000 penalty as part of the settlement. But he won’t pay that either. The third and most high-profile Fannie executive who was also charged in the suit, former CEO Daniel Mudd, was not part of the settlement and is still fighting SEC fraud charges.

The SEC’s case against Lund and the others claimed Fannie only classified a small portion of the mortgages it made to lower-credit-score borrowers as subprime. In early 2007, the company reported that just 2% of its portfolio was tied to subprime mortgages. Fannie’s actual exposure, according to the government, was more like 22%.

But the government claimed that Fannie excluded from its definition of subprime as much as $100 billion worth of loans that were made to low-credit-score borrowers who should have been considered subprime, but because of Fannie’s purposefully narrow definitions, they did not.

The government went after Lund because he was in charge of Fannie’s single-family division, and he was the sole person from his unit who was in charge of disclosure. He also had to sign off on disclosures about the division that were made to Fannie investors, which the SEC claimed were misleading.

Lund’s lawyer said his client did nothing wrong, and the terms of the settlement prove that.

Still, Josh Rosner, who was early in spotting the housing market problems that resulted in the financial crisis and later co-wrote a book on the financial crisis called Reckless Endangerment, said he isn’t too upset about the settlement. Rosner, who has long followed Fannie Mae, says the fact that there wasn’t a clear definition of what subprime mortgages were was a problem. Also he thinks banks played a much bigger role than Fannie in the spread of the reckless mortgage lending that led to the financial crisis.

Still, the SEC has been trying to fight criticism that it let financial executives who were responsible for the crisis off the hook. These latest Fannie settlements won’t help, however. “This case is more PR spin and baloney rather than real enforcement that will have any affect on the conduct of people in the financial markets,” says Dennis Kelleher, who heads Better Markets, a non-profit that supports more reform of Wall Street.

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