SEC Investigation Puts Additional Heat on GSEs

The head of ""Fortress Investment Group"":www.fortressinv.com/ has left his position with the company and has simultaneously stepped down from the company's board of directors. Daniel Mudd, who has previously served as the CEO of ""Fannie Mae"":www.fanniemae.com/, is currently one of six former GSE executives under investigation by the ""Securities and Exchange Commission"":www.sec.gov/ for fraud-related charges.

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In addition to Mudd, Enrico Dallavecchia, who has acted as the government-sponsored enterprise's chief risk officer, and Thomas Lund, who has been Fannie's executive vice president for its single-family mortgage business, also stand charged with misrepresenting the company's subprime mortgages in advance of the country's mortgage market crisis.

Other GSE-related professionals being targeted by the SEC's probe include former CEO and chairman of ""Freddie Mac"":www.freddiemac.com/, Richard Syron; Freddie's former chief business officer, Patricia Cook; and its former executive vice president of the entity's single-family guarantee business, Donald J. Bisenius.

The SEC's accusations encompass fraudulent actions regarding the GSEs' exposure to subprime loans. Primarily, the SEC is focused on misleading maneuvers that occurred between March 2007 and August 2008, and the government organization alleges that the professionals under investigation made or crafted facetious statements and reports that represented a false portrayal of subprime issues to the public, investors, and the media.

Those among Fannie's former leadership are also being examined for their behavior related to Alt-A loans. The SEC claims that the Fannie executives misrepresented the amount of Alt-A loans within the GSE's portfolio, stating that only 11 percent of included loans were Alt-A when the total was actually a much more elevated 18 percent.

Speaking out on his departure from Fortress, Mudd said, ""I have requested a leave of absence from my position as chief

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executive officer to ensure that any time or attention I need to focus on matters outside of Fortress will not affect the business or operations of the company.""

Randal Nardone will take over as Fortress' interim CEO in Mudd's absence; Nardone is a principal and co-founder of the company. Of his new appointment, Nardone noted, ""Fortress is very well-positioned today, and across our company, we remain single-mindedly focused on managing our investment funds and capitalizing on opportunities to create value for our investors. We look forward to Dan's return in the hope that matters are resolved favorably and expeditiously.""

Commenting on the SEC's legal pursuit of the six former GSE leaders, Robert Khuzamai, director of the SEC's enforcement division, stated, ""These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk on the company's books ├â┬ó├óÔÇÜ┬¼├é┬ª 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.""

Mudd's decision to remove himself from Fortress follows other major industry personnel departures, specifically those at Freddie. In late 2011, Freddie's CEO, Ed Haldeman; chairman, John Koskinen; and board members Laurence Hirsch and Robert Glauber announced that they would resign their current positions with the entity.

Meanwhile, the GSEs are still trying to defend themselves against the executive pay scandal, which brought both Fannie and Freddie's bonus structure into question. The multi-million dollar compensations haven't helped the GSEs' image problem, and since both Fannie and Freddie are under conservatorship, their internal moves now have a greater impact on the ""Federal Housing Finance Agency"":www.fhfa.gov/.

The FHFA's acting director, Edward DeMarco, appeared before the House Financial Services Committee recently to answer for the GSE bonus problems, and DeMarco said, ""Others may believe that this sort of talent is easily and quickly hired at compensation far below that of competing private firms, but I do not ├â┬ó├óÔÇÜ┬¼├é┬ªThis is a question of judgment, judgment exercised by balancing the need to limit compensation as much as possible while ensuring stable and continuous operations at the enterprises in support of the nation's housing finance system.""

Continuing his commentary, DeMarco attempted to shift blame toward Congress, adding, ""The best way to address concerns with executive compensation is action by Congress to reform the housing finance system and dissolve the conservatorships.""