Okay, let us get this straight.  If Fannie & Freddie settle with the SEC, how might this impact the FHFA lawsuits against the world's largest 17 banks?  What we mean is ...

(i) LAST WEEK .... the Federal Housing Finance Authority sued 17 banks to get them to buy back $196 billion worth of subprime mortgage-backed securities that they sold to Fannie Mae and Freddie Mac, because those quasi-government agencies didn't know, understand or realize that the mortgages underlying the securities they purchased were incredibly risky and prone to default.

(ii) NEXT .... today, one week later, we learn Fannie Mae and Freddie Mac are settling SEC charges that they didn't disclose their exposure to risky subprime loans - and thus misled their own investors.  Of course, neither Fannie nor Freddie admitted that they committed fraud and they would not have to pay any monetary penalty.

(iii) NOW .... can we determine if the SEC investigation involved or dealt with the same subprime loans or mortgage-backed securities that Fannie and Freddie purchased from the banks - and which the FHFA wants the banks to repurchase?

(iv) IF SO .... and the answer is yes, wouldn't the SEC settlement support (though not substantiate) the banks' contention that Fannie and Freddie were sophisticated investors that understood what they were buying - i.e., they knew the potential risks they were taking when they purchased these subprime mortgage-backed securities?

N.B. C-I knowingly poses these questions with the understanding that we may be accused of faulty, circular reasoning, or worse.  Which is fine because, as journalists, we seek out the TRUTH.

The News Behind Our Rantings. SEC Enforcement Chief Robert Khuzami reportedly met this summer with lawyers for ex-chiefs of Freddie Mac and Fannie Mae.  Now, less than a week the unofficial end of summer, we learn of a proposed agreement between the parties that would bring to a close the SEC's 3-year investigation into whether these mortgage finance giants failed to adequately disclose their exposure to risky subprime loans. As proposed, there would be no monetary penalty nor admission of fraud.  However, a settlement would represent the most significant acknowledgement yet by the mortgage companies that they played a central role in the housing boom and bust.  And the SEC records a "win" which can only help its damaged reputation - if only for a day or two. Of course, it should be cautioned that negotiations have been going on since at least early summer, and a deal may not materialize until later this year - or may fall through altogether. NYT Dealbook Poses Same Quandary C-I Discusses Above. The potential settlement - even it if it is little more than a rebuke - comes at an awkward time for Fannie Mae and Freddie Mac.  Dealbook continues to note that the SEC reportedly abandoned hopes of assessing a fine because of the precarious financial positions of the two companies.  The government has already propped up Fannie Mae and Freddie Mac with more than $100 billion since taking control of them in 2008. Any fee levied against them would simply wind up on the taxpayers’ tab. The sprawling investigation into Fannie Mae and Freddie Mac once encompassed both civil and criminal elements, making headlines as one of the most significant cases to stem from the financial crisis. The case also threatened to ensnare some of Fannie and Freddie’s former top officials. Earlier this year, recent chief executives at both companies received so-called Wells notices from the SEC, an indication that the agency was considering a civil enforcement action against them.

The executives were Richard Syron, former CEO of Freddie Mac; Daniel Mudd, former CEO at Fannie Mae;  Anthony Piszel, former CFO Freddie Mac;  and, Donald Bisenius, EVP at Freddie Mac until his recent departure.  None of the individuals have been accused of any wrongdoing.  Mr. Mudd and Mr. Syron are the 2 most prominent individuals in the case.  Mr. Mudd is now CEO of Fortress Investment Group, a publicly-traded hedge fund and PE firm.  Mr. Syron, a former Amex president, is an adjunct professor at Boston College and serves on its board of trustees.

In the "end" now, 3 years later, a civil settlement is all the government can pin on the companies, and no blame associated with any individual.  The criminal inquiry has sputtered to a halt.  At the SEC, regulators have zeroed in on the fine print of Fannie’s and Freddie’s disclosures, according to those who have been briefed on it. The agency is specifically looking at the way the companies reported their subprime mortgage portfolios and concentrations of loans extended to borrowers who offered little documentation. While Fannie and Freddie do not offer home loans, they buy thousands of mortgages from lenders and resell them in packages to investors. The SEC’s case hinges on whether the companies misled the public and regulators by lowballing the number of high-risk mortgages on their books. According to Dealbook, a potential weakness of the case is that it hinges on the definition of subprime, which the government itself has struggled to nail down. The term often references loans to borrowers with low credit scores and spotty payment records. But Fannie and Freddie categorized loans as prime or subprime based on the lender rather than on the loan itself. To access the full story, go to:   [DealBook, 9/8/11, "Settlement Said to Be Near .."]