December 16, 2011 12:17PM

SEC Claims Fannie and Freddie Were Deep into Subprime Lending

One of the regular claims from Fannie Mae and Freddie Mac apologists (you know who you are) is that the two entities were blameless as they weren’t involved in subprime. Back in 2008, Paul Krugman went so far as to say, “they didn’t do any subprime, because they can’t.” Just taking 10 minutes to read the actual statute and regulations would have revealed to him that they actually could. Krugman went on to say, “Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.” Of course, just reading Fannie’s 10-K would have revealed that claim to be false. But why let facts get in the way?

Fortunately, the Securities and Exchange Commission has decided that not only could the GSEs buy subprime, but they did in fact do so and, even worse, they lied about it. The SEC’s complaints can be found here, and despite all the legal jargon, they make for quite an interesting read. If you’d like something with a little less legalese, my analysis of the GSEs’ role in subprime reaches similar conclusions.

Now of course, just like anyone else, former Fannie and Freddie executives deserve their day in court and should be assumed innocent until proven guilty. I hope that, in this instance, the SEC abandons its usual flawed practice of reaching settlements and avoiding trials. The public policy issues are simply too important here to let the executives just pay a settlement and bury the agreement. After having spent, so far, $160 billion bailing out these entities, the public has a right to know what was happening inside them. And of course, if the executives are innocent, they have the right to see that displayed before the public in a court of law.