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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
action to investigate the Repo allegations, . . . took no steps to question or chal-
lenge the non-disclosure by Lehman,” and that “colorable claims exist that E&Y did
not meet professional standards, both in investigating Lee’s allegations and in con-
nection with its audit and review of Lehman’s financial statements.” New York At-
torney General Andrew Cuomo sued E&Y in December , accusing the firm of
facilitating a “massive accounting fraud” by helping Lehman to deceive the public
about its financial condition.
The Office of Thrift Supervision had also regulated Lehman since through
its jurisdiction over Lehman’s thrift subsidiary. Although “the SEC was regarded as
the primary regulator,” the OTS examiner told the FCIC, “we in no way just assumed
that [the SEC] would do the right thing, so we regulated and supervised the holding
company.” Still, not until July —just a few months before Lehman failed—
would the OTS issue a report warning that Lehman had made an “outsized bet” on
commercial real estate—larger than that by its peer firms, despite Lehman’s smaller
size; that Lehman was “materially overexposed” to the commercial real estate sector;
and that Lehman had “major failings in its risk management process.”
FANNIE MAE AND FREDDIE MAC: “TWO STARK CHOICES”
In , while Countrywide, Citigroup, Lehman, and many others in the mortgage
and CDO businesses were going into overdrive, executives at the two behemoth
GSEs, Fannie and Freddie, worried they were being left behind. One sign of the
times: Fannie’s biggest source of mortgages, Countrywide, expanded—that is, loos-
ened—its underwriting criteria, and Fannie would not buy the new mortgages,
Countrywide President and COO Sambol told the FCIC. Typical of the market as a
whole, Countrywide sold of its loans to Fannie in but only in and
in .
“The risk in the environment has accelerated dramatically,” Thomas Lund, Fan-
nie’s head of single-family lending, told fellow senior officers at a strategic planning
meeting on June , . In a bulleted list, he ticked off changes in the market: the
“proliferation of higher risk alternative mortgage products, growing concern about
housing bubbles, growing concerns about borrowers taking on increased risks and
higher debt, [and] aggressive risk layering.”
“We face two stark choices: stay the course [or] meet the market where the market
is,” Lund said. If Fannie Mae stayed the course, it would maintain its credit discipline,
protect the quality of its book, preserve capital, and intensify the company’s public
voice on concerns. However, it would also face lower volumes and revenues, contin-
ued declines in market share, lower earnings, and a weakening of key customer rela-
tionships. It was simply a matter of relevance, former CEO Dan Mudd told the
FCIC: “If you’re not relevant, you’re unprofitable, and you’re not serving the mission.
And there was danger to profitability. I’m speaking more long term than in any given
quarter or any given year. So this was a real strategic rethinking.”
Lund saw significant obstacles to meeting the market. He noted Fannie’s lack of
capability and infrastructure to structure the types of riskier mortgage-backed secu-
