SEC Sues Fannie Mae and Freddie Mac

Two interesting recent Opinion pieces in the Wall Street Journal focus on the role that Governmental Sponsored Entities Fannie Mae and Freddie Mac played in the financial market crisis of 2008. The Securities and Exchange Commission has filed a lawsuit against several Fannie and Freddie executives alleging that these executives engaged in securities fraud by significantly understating the GSE's exposure to subprime loans it held and/or securitized in the run-up to the mortgage meltdown.

What Fannie and Freddie Knew

The Financial Crisis on Trial

While both articles are editorial/opinion pieces, each uses the SEC's lawsuit against Fannie and Freddie executives to make intriguing arguments about the role of government policy in the market crisis. The articles argue that Fannie and Freddie downgraded lending standards in an effort to meet HUD guidelines in connection with making housing affordable to Americans with sketchy credit and then served as the buying agent of many of these recklessly written loans. That the GSE's played a role in the crisis is now buttressed by the SEC's lawsuit.

One problem however, that I identified in my recent Utah Law Review piece Racial Coding and the Financial Market Crisis, is that both Democrats and Republicans strain desperately to place the blame for the financial market crisis on one single cause. Here, the Op-Ed pieces in the Wall Street Journal continue, now three years later, to attempt to pin single causation blame for the market crisis on one factor, namely Fannie Mae and Freddie Mac. While the SEC's lawsuit seems to indicate that Fannie and Freddie played a larger role in the crisis, due in part to its fraudulent reporting of subprime exposure, there are at least a dozen additional factors and causes that led to a near global meltdown, including predatory lending, credit rating agency complicity, predatory borrowing, deregulation, derivatives shadow trading, credit default swaps, collateralized debt obligations, etc. It disserves the public interest to attempt to blame the market crisis on one single factor, like the Op-Ed pieces attempt to do.

Switching gears: Professor Paul Butler has written a very interesting Op-Ed in the New York Times in connection with Jury Nullification and the nation's wayward War on Drugs and sentencing policies.

Jurors Need to Know They Can Say No

Therein, Butler argues: "Jury nullification is not new; its proponents have included John Hancock and John Adams. The doctrine is premised on the idea that ordinary citizens, not government officials, should have the final say as to whether a person should be punished. As Adams put it, it is each juror’s 'duty' to vote based on his or her 'own best understanding, judgment and conscience, though in direct opposition to the direction of the court. . . .'

Nullification has been credited with helping to end alcohol prohibition and laws that criminalized gay sex. Last year, Montana prosecutors were forced to offer a defendant in a marijuana case a favorable plea bargain after so many potential jurors said they would nullify that the judge didn’t think he could find enough jurors to hear the case. (Prosecutors now say they will remember the actions of those jurors when they consider whether to charge other people with marijuana crimes.) . . .

How one feels about jury nullification ultimately depends on how much confidence one has in the jury system. Based on my experience, I trust jurors a lot. I first became interested in nullification when I prosecuted low-level drug crimes in Washington in 1990. Jurors here, who were predominantly African-American, nullified regularly because they were concerned about racially selective enforcement of the law. Across the country, crime has fallen, but incarceration rates remain at near record levels. Last year, the New York City police made 50,000 arrests just for marijuana possession."