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Fannie and Freddie’s Missing Testimony
Will any witnesses support Washington’s fantasy version of events?
March 25, 2015 7:19 p.m. ET
Life is good these days for regulators prosecuting big banks. Most banks surrender without a fight. And if a bank doesn’t settle, you don’t even have to provide witnesses from the alleged victims of bank behavior.
At least that’s the story in the federal government lawsuit against the U.S. unit of Japanese bank Nomura now running in federal court in New York. The government claims that Fannie Mae and Freddie Mac were misled by giant banks into buying bundles of shoddy mortgages. But even though Fannie and Freddie together employed more than 10,000 people in the years before the financial panic, no one from either company is saying in court that Nomura misled them.
That may be because in separate lawsuits in which Fan or Fred was named as a defendant, they have blamed an unexpected, sharp downturn in the housing market for their troubles. This is the same defense Nomura is now using against the government.
Not that this seems to worry government-friendly Judge Denise Cote, who is presiding over the victimless proceeding. In pre-trial rulings, she has ensured that the Federal Housing Finance Agency that regulates Fan and Fred doesn’t have to delve into the inconvenient facts about their business relationship with Nomura. We told you recently that the government dropped its damages claim—potentially the most lucrative part of the case—and thereby avoided a jury trial. This leaves it up to Judge Cote to decide on Nomura’s alleged liability.
So far the judge has ruled out evidence that Fan and Fred had a hand in selecting the particular loans that went into the securities they bought, including evidence that they wanted risky loans to satisfy federal affordable housing goals. Judge Cote also ruled out evidence showing Fan and Fred had examined and favorably reviewed the originators of loans that went into those securities.
She did allow in Nomura emails questioning the quality of mortgages. But the judge ruled out emails featuring Fannie Mae employees crafting jingles about the subprime market with lines like “Thanks to Joe Borrower who’s too poor to pay.” We’re told that in pre-trial depositions the government had a hard time getting any Fan and Fred staff who worked on the Nomura deal to blame the bank. And now thanks to Judge Cote the government doesn’t need them.
Ruling out evidence of Fan and Fred’s knowledge of the market and the particular loan pools they bought allows the judge to treat the toxic twins as babes-in-the-woods abused by banks. This makes a mockery of the securities laws, which are intended to ensure that investors have access to relevant, material facts about a potential investment. Can other investors now sue by pretending not to know information and then claiming it was withheld from them?
Instead of Fannie and Freddie employees testifying about their work with Nomura, the case will likely rely on experts applying underwriting standards that Nomura never promised to meet and a valuation model that didn’t even exist at the time.
Not that the experts would be all that persuasive to a jury, even if one were permitted to hear this case. Last week one of the government’s star witnesses, an expert on appraisals, was forced to admit on the stand that he had falsified his appraisal license applications in numerous states around the country. Will it even matter to Judge Cote?
