Fannie, Freddie, the Feds and Freud

Dec. 25, 2011— -- As a citizen, a voter, and a consumer, what do you think this country needs? Less partisanship in Congress? Less Congress? Easier credit? Lower taxes? Higher taxes?

There are about 307 million Americans and given the state of the American economy, perhaps there are as many answers to that question.

Here's my take: We need a good shrink. I'm talking real, Freudian-style analysis, because we don't seem to be paying attention to what we're doing, both individually, with regard to how we vote, and institutionally, with regard to policy. Last week, we took a look at the former, this week, we focus on the latter.

[Related article: Who's Killing the CFPB? We Are.]

When I was growing up, I was taught that the purpose of government was to "promote the general welfare," and to provide "liberty and justice for all." I guess it depends upon your definition of the word "all."

The "all" keeps getting smaller.

These days it seems that government functions largely as the protector of the rich, or perhaps as the not-necessarily-unbiased referee in a wrestling match between those who got and those who have not.

For example, last week, finally, the SEC sued six guys—three executives from Fannie Mae and three from Freddie Mac alleging securities fraud. Now don't get too excited. The fraud that's being alleged has nothing to do with defrauding you or any other homeowner. Instead the SEC alleges that Fannie and Freddie defrauded large institutional investors, who bought portfolios of their securitized mortgages, by vastly understating the risk associated with subprime loans, and by mischaracterizing many such loans with words other than "subprime."

"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, Director of the SEC's Enforcement Division. "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. 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.

See—it's the investors who got hurt, not you.

The securities laws of the United States, administered by the SEC, involve thousands of often abstruse rules and regulations, but they all boil down to one simple idea: you gotta tell the truth. Theoretically, one could sell to the public the securities of a company intending to mine the green cheese of the moon so long as the prospectus describing those securities accurately represented the risks associated with the proposed endeavor. The SEC complaints against Fannie and Freddie really charge just one thing—that in selling those now-infamous mortgage-backed securities, the defendant executives didn't tell the truth. The complaints don't allege that there was any actual fraud—no one stole any money and no one was manipulating prices or markets—it's just that all those investors in Asia, Europe and Wall Street were misled. The only allegation of real breaking bad was the almost parenthetical mention of the fact that the six employees in question received incentive compensation—and a lot of it—based, in part, on the profits from securitizations of subprime loans.