Disclosure issues hounding CEOs

Of all the stories to come out of the 2008 collapses of Fannie Mae and Freddie Mac, this one may be the most incredible: To this day, neither company has admitted that any of the numbers on its financial statements that year were wrong.

It seems the Securities and Exchange Commission (SEC) won't be doing anything to challenge that pretence, either, and that this may be by design. The SEC for years has been bending over backward to avoid accusing major financial institutions of cooking their books, even when it's obvious they did. So much for upholding financial integrity.

Last week the regulator notified former Fannie Mae Chief Executive Officer Daniel Mudd that it may file civil claims against him. The allegations wouldn't be about Fannie Mae's accounting, though. They would focus on whether the government- chartered housing financier accurately disclosed to investors how much of its loans were subprime.

"The disclosures and procedures that are the subject of the staff's investigation were accurate and complete," Mudd said in a statement last week. He said he would submit a written response "that will make clear why the SEC staff should not pursue any action in this matter".

There's a pattern here. When the SEC in 2009 accused former Countrywide Financial CEO Angelo Mozilo of securities fraud, it claimed the lender's management foresaw as early as 2004 that the company would suffer massive credit losses on the home loans it was making.

The SEC's complaint accused Mozilo of "disclosure fraud" for hiding such information from investors.

Yet if the SEC's allegation were true, it would mean Countrywide had been overstating its earnings for years, by delaying the recognition of losses long past the point when management knew they were probable. That would be an accounting violation. The SEC never made that connection in its complaint, though, and clearly had made a decision not to. Mozilo later paid $67.5 million (Dh247.9 million) to settle the suit, without admitting or denying the regulator's claims.

Similarly, when the SEC accused three former IndyMac Bancorp executives of securities fraud last month, it claimed they had made false and misleading disclosures about the company's financial stability. IndyMac's regulator, the Office of Thrift Supervision, by then had already admitted to letting the company backdate a capital contribution to its main banking unit in May 2008, so it would appear in the prior quarter.

IndyMac collapse

That was a violation of generally accepted accounting principles, the Treasury Department's inspector general said in a 2009 report. Yet the SEC didn't identify any accounting errors at IndyMac. The company showed shareholder equity of $959 million, as of March 31, 2008.

By July 2008, IndyMac had failed, costing the Federal Deposit Insurance Corp $10.7 billion. Likewise, last month Freddie Mac's former chief financial officer, Anthony "Buddy" Piszel, said he received a Wells notice from the SEC, indicating the regulator might sue him. Piszel said the inquiry concerned "certain disclosure matters," according to a press release by CoreLogic, where he was CFO until February 10. There was no mention of Freddie's accounting.

— Bloomberg