Columbus Dispatch: Freddie Mac swindles OPERS out of millions; AG Dann files suit

Ohio vs. Freddie Mac
Mortgage lender hid big risks, suit alleges
Wednesday, January 23, 2008
By James Nash

THE COLUMBUS DISPATCH The giant mortgage financer known as Freddie Mac swindled an Ohio pension system out of as much as $27 million by concealing its heavy investments in the battered subprime lending industry, Attorney General Marc Dann alleges in a lawsuit.
Dann said the Federal Home Loan Mortgage Corp. "secretly and intentionally participated in one of the largest housing investment deceptions in modern U.S. economic times."

The lawsuit, filed Friday in federal court in Youngstown, alleges that Freddie Mac downplayed its investments in subprime lenders before its stock nosedived in November on news that it lost $2 billion in the third quarter, largely because of the collapse in the subprime market.

The Ohio Public Employees Retirement System, which represents nearly 900,000 current and retired government employees and their beneficiaries, lost up to $27.2 million in the crash, the lawsuit alleges.

Dann's office has named the retirement system as the lead plaintiff in the case, which could broaden to include other public pension plans.

In a press release announcing the lawsuit after the close of business yesterday, Dann said he is determined to hold mortgage lenders accountable for their role in the collapse of the subprime market.

"By authorizing me to bring this suit on their behalf (state pension officials) are protecting the interests of the pension plan, the workers and retirees who depend upon it and the taxpayers whose hard-earned dollars fund it," Dann said. "And they are also sending a loud and clear message to Wall Street that this type of fraud and manipulation will not be tolerated by the people who live on the Main Streets that are being devastated by what Freddie Mac has done."

Dann's aides did not return messages seeking comment after sending the announcement.

Freddie Mac spokeswoman Sharon J. McHale said the company does not comment on pending litigation.

Based in suburban Washington, Freddie Mac is backed by the federal government but its stock is publicly traded. Like its larger cousin Fannie Mae, Freddie Mac purchases, guarantees and securitizes mortgages.

McHale noted that as of Nov. 15, more than 97 percent of Freddie Mac's securities were rated AAA. Although some securities were downgraded amid turmoil in the mortgage industry, Freddie Mac is holding onto them for a period sufficient to recover all unrealized losses, the company said.

In addition to charging Freddie Mac with concealing its involvement in the subprime market, Dann's lawsuit says the company failed to account for the level of risk it was incurring. The lawsuit also says the company neglected to say that it could not gauge the level of exposure it had with loan guarantees.

In 2006, Freddie Mac paid $410 million to settle a national class-action lawsuit led by two Ohio pension systems alleging that it had misstated its finances between 1999 and 2003.

jnash@dispatch.com