In "Fannie, Freddie Proble Focuses on Disclosure" (March 14, 2011) Wall Street Journal reporters Nick Timiraos and Jean Eaglesham write that the former CEO of Fannie Mae has received a Wells notice from the U.S. Securities and Exchange Commission that alleges knowledge of improper risk disclosures. An earlier response by Mr. Mudd, now CEO of Fortress Investment Group LLC, was published by Bloomberg on March 11, 2011 and describes said disclosures and procedures as "accurate and complete" and "previewed by federal regulators." Click to read "Statement by Fortress CEO Daniel Mudd on SEC Wells Notice" by Lawrence Roberts, Bloomberg, March 11, 2011.
As I wrote on August 28, 2008 in "Fannie Mae Gets a New Chief Risk Officer," changes appeared to be underway at that time, begging for details. For one thing, how was Fannie Mae's new focus on risk management different from past practices? Second, several of the Fannie Mae board members added since early 2004 were no longer listed as active in 2008 but certainly held themselves out as risk management experts. What was their contribution to improving policies, procedures and oversight? According to a November 2007 letter to shareholders by then chairman of the Fannie Mae board Stephen B. Ashley, "These past three years, Fannie Mae has undertaken a series of fundamental changes to remediate our accounting and controls and to put the company on a solid foundation going forward. These changes have done more than fix what needed fixing about the company."
On September 30, 2010, U.S. District Judge Paul A. Crotty granted defendants' motion to dismiss allegations regarding Fannie Mae's "subprime and Alt-A mortgage exposure and financial reporting as to all the Individual Defendants" but denied defendants' "motion to dismiss as to Plaintiffs' allegations regarding Fannie's internal controls and risk management" as to then CEO and Chief Risk Officer, respectively. Click to read "In re Fannie Mae 2008 Securities Litigation," United States District Court, Southern District of New York, filed September 30, 2010.
As I've long predicted, examinations about existing best practices (or lack thereof) are going to continue. If there is a silver lining to the financial fallout and risk management oversight failures that make for headlines aplenty, it is that "good players" will hopefully be rewarded for their discipline and those who have been remiss will start to pay more attention to the nuts and bolts of risk management.
Regarding Fannie Mae and its putative importance as part of the national housing finance market, shareholders and taxpayers welcome insights about who knew what and when and why.