Businessweek on former Fannie Mae CEO Mudd

Bloomberg Businessweek’s cover profile of former Fannie Mae CEO Daniel Mudd by Max Abelson paints quite a picture of the man who some claim was at the heart of the mortgage giant’s collapse. He certainly has the civil lawsuit headaches, but as Abelson reports, it’s not keeping him up at night.

Here’s part of the introduction to the piece:

Thirty years later, Mudd still gets out of bed whenever he hears a noise downstairs in his 15,000-square-foot home. “I have to go down and investigate it,” he says. “But I don’t lose sleep about other stuff.” That includes a Securities and Exchange Commission lawsuit accusing him of masking billions of dollars of subprime exposure as Fannie Mae’s (FNMA) chief executive officer before its September 2008 collapse. The firm and its younger cousin Freddie Mac (FMCC) were the largest mortgage financers in the U.S., guaranteeing or owning about half the country’s $12 trillion in loans. According to the complaint, the SEC wants Mudd fined and permanently banned from running public companies, a penalty almost all the executives at the heart of the meltdown have avoided.

 “I’m sitting here going, yeah, OK, doesn’t make it true. Doesn’t make it right,” he says. “If somebody says something else about it, I know what I did, it’s their problem.”

Abelson then goes on to show a man who is at time defiant about the government’s lawsuit and unapologetic about his leadership of Fannie Mae during the financial crisis. Some of the facts don’t look too good for Mudd.

In June 2005, when Mudd was promoted to president and full CEO, executives saw a “stark” choice between taking more risk or facing lower profits, according to the congressionally appointed Financial Crisis Inquiry Commission. The firm pushed into lower-documentation loans and other risky products that year “without adequate controls in place,” one Federal Housing Finance Agency examination said later. According to the FCIC’s 2011 report, Fannie Mae embraced risk to improve market share, meet Wall Street’s growth expectations, and ensure high pay—with Mudd earning about $24 million in taxable compensation from 2006 to 2008, the SEC says.

In 2007, Fannie Mae’s internal five-year strategy plotted out its move “deeper into the credit pool,” underlining the plan to “take and manage more mortgage credit risk” even as it cited the weakening housing market across the country. In a note to another colleague cited by Senate investigators, Chief Risk Officer Enrico Dallavecchia called the firm’s risk-control processes some of the weakest he’d “ever witnessed.” Then he e-mailed Mudd to say he was upset about hearing in a board meeting that the firm supported taking more risk even as it was planning to cut his department’s budget. “My experience is that email is not a very good venue for conversation, venting or negotiating,” Mudd wrote back, telling his risk officer to “address it man to man.” He ended the e-mail with an invitation to “see me today face to face.” Dallavecchia, now his co-defendant in the SEC suit, told the FCIC he’d been tired and oversensitive.

Under Mudd, Fannie Mae’s push into risky U.S. home loans was ambitious. With foreclosure rates hitting records in 2007, the Office of Federal Housing Enterprise Oversight noted the firm wanted to capture a fifth of the subprime market, according to the FCIC. Its report describes the Fed discovering insufficient reserves and massive potential losses inside Fannie Mae after agreeing in July 2008 to provide it emergency loans.

For his part, Mudd believes he’s been held accountable for the company’s downfall:

The suit alleges that the firm’s filings left out exposure to around $341 billion of reduced-documentation loans called Alt-A. One possible explanation for a gap the size of the Danish economy is the quirkiness of classification, with different reasons to label loans in different ways changing over time and place. Loan definitions were “a bit squishy,” says Thomas Stanton, a former FCIC member. No matter how they were catalogued, risky loans helped destroy the firm, according to his committee’s report. Since Fannie Mae and Freddie Mac were put into conservatorship in September 2008, they’ve drawn more than $187 billion from the U.S. Treasury.

Mudd, meanwhile, says he’s already been held to account. “I didn’t predict the collapse of the mortgage market—I was the CEO of a mortgage company, my mistake,” he says. “Don’t blame anybody else for that. Lost my job, got no bonus, got no severance, got no parachute, got no options, said, ‘That’s the way it goes.’ Packed up, sold my house, moved to another town and another job—accountable.”

The piece also offers an excellent history of the leadership of the mortgage giant and the politics that surround it. It details the massive loans that Fannie Mae needed in order to stay afloat as well as the company’s return to profitability in 2012.

It’s an excellent piece of work that concisely lays out the case against Mudd as well as his response to it. The history is also easy to follow, especially in a story that unfolded over many years during a tumultuous time. I also like how Abelson offers a clear window into Mudd’s personality woven throughout the story. It’s a great read and balanced look at the company.