The financial crisis on trial
The SEC fingers the government-backed mortgage buyers, not Wall Street greed

Article Highlights

  • The SEC's lawsuits against 6 top executives of Fannie Mae and Freddie Mac, announced last week, are a seminal event

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  • The SEC is saying that Fannie and Freddie hid hid the size of their purchases from the market.

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  • For the first time in a government report, the complaint has made it clear that Fannie and Freddie hold the blame

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The Securities and Exchange Commission's lawsuits against six top executives of Fannie Mae and Freddie Mac, announced last week, are a seminal event.

"The SEC is saying that Fannie and Freddie-the largest buyers and securitizers of subprime and other low-quality mortgages-hid the size of their purchases from the market." --Peter J. Wallison

For the first time in a government report, the complaint has made it clear that the two government-sponsored enterprises (GSEs) played a major role in creating the demand for low-quality mortgages before the 2008 financial crisis. More importantly, the SEC is saying that Fannie and Freddie-the largest buyers and securitizers of subprime and other low-quality mortgages-hid the size of their purchases from the market. Through these alleged acts of securities fraud, they did not just mislead investors; they deprived analysts, risk managers, rating agencies and even financial regulators of vital data about market risks that could have prevented the crisis.

The lawsuit necessarily focuses on 2006 and 2007, the years that are still within the statute of limitations. But according to the SEC complaint, the behavior went on for many years: "Since the 1990s, Freddie Mac internally categorized loans as subprime or subprime-like as part of its loan acquisition program," while its senior officials continued to state publicly that it had little or no exposure to subprime loans.

The full text of this article is currently available to Wall Street Journal subscribers. The full text will be posted here on Monday, Dec. 26.

Peter Wallison is a senior fellow at AEI.

 

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