In the cherry-paneled library in his six-bedroom house in Greenwich, Conn., with his arms stretched high above his head, Daniel Mudd is gripping an imaginary shovel. He’s telling a story about how he once woke up in Lebanon, in 1983, with another U.S. Marine holding a real one just like that, about to bring it down on him. The soldier’s name was Pfautz.
“And he brings it down—on the wall,” Mudd recalls. “He says, ‘Sir, there was a scorpion crawling down the wall toward you.’ And I said, ‘Pfautz, if I had been quicker on the draw I would have shot you four times, before you killed the scorpion.’ ”
Courtesy J. Noel Williams
Thirty years later, Mudd still gets out of bed whenever he hears a noise downstairs in his 15,000-square-foot home. “I have to go down and investigate it,” he says. “But I don’t lose sleep about other stuff.” That includes a Securities and Exchange Commission lawsuit accusing him of masking billions of dollars of subprime exposure as Fannie Mae’s (FNMA) chief executive officer before its September 2008 collapse. The firm and its younger cousin Freddie Mac (FMCC) were the largest mortgage financers in the U.S., guaranteeing or owning about half the country’s $12 trillion in loans. According to the complaint, the SEC wants Mudd fined and permanently banned from running public companies, a penalty almost all the executives at the heart of the meltdown have avoided.
“I’m sitting here going, yeah, OK, doesn’t make it true. Doesn’t make it right,” he says. “If somebody says something else about it, I know what I did, it’s their problem.”
Mudd, 54, is back in home loans, doing mortgage industry consulting, and also helping to develop an aviation infrastructure project in West Africa. Last November, three months after a U.S. District judge rejected his request to dismiss the suit, Mudd registered a company for his new work called DBDh Advisory. It stands for Death Before Dishonor.
His clients have included Loews (L), which oversees insurance and gas pipeline holdings. “He’s very comfortable with everything he’s done in his life,” says Benjamin Tisch, whose family runs Loews. “Dan sleeps very comfortably at night knowing that he is a high-character, high-quality individual.” Tisch is also friends with former Lehman Brothers CEO Dick Fuld, who once helped him through a childhood asthma attack in Utah’s Bryce Canyon. “The country could not have picked two worse people to make villains,” Tisch says. “They are such good people, both of them. And they are both incredible leaders.”
Mudd is battling a powerful narrative that says otherwise. The suit accuses him of telling investors and the government that his firm’s multiyear binge on risky assets was minimal or imaginary, even as he directed a drive into reduced-documentation loans, routinely saw Fannie Mae subprime data, and certified its filings. Besides the accusations, and an early retirement, he’s up against Wall Street critics who want the executives who took immense risks with borrowed money punished for causing the deepest slump since the Great Depression. To Mudd, one of the few to face even a civil trial, there were too many home buyers and too much political pressure on Fannie Mae to support them. He calls the securities fraud suit singling him out a phony, desperate political ploy that hardly affects his schedule, let alone his dignity.
“People say to me, ‘How’s this whole thing going?’ I spend 10 minutes a month on this SEC thing, all right?” Mudd says. “Some of it may be I’m missing my stress gene or something like that. But some of it goes to the actual facts.”
Mudd says he’s been mistaken for Larry Hagman, who played oil magnate J.R. Ewing on Dallas. His father is the former CBS News broadcaster Roger Mudd, and their ancestor Dr. Samuel Mudd was convicted of helping John Wilkes Booth after Abraham Lincoln’s assassination. The conviction’s stain on the family’s reputation is said to have popularized the saying “your name is mud.”
In Greenwich, he works out of a home library decorated with buffalo horns, a Marine helmet, another one from the Israeli Army, two guitars he hand-painted with psychedelic swirls, and a depiction of a wolpertinger, the mythical Bavarian animal. He’s talking about Lebanese military history when his phone goes off. The ringtone is the opening of Elvis Costello’s (The Angels Wanna Wear My) Red Shoes: “I used to be disgusted/And now I try to be amused.” Mudd repeats the line and says he doesn’t know why he chose it for his ring. “I’m sorry, I’m not that self-examining of a person,” he says.
Photograph by Linda Spillers/The New York Times/Redux
Mudd, who’s six foot four, graduated in 1980 from the University of Virginia, where he rowed crew, and trained for that year’s U.S.-boycotted Olympics in Moscow. He still rows, practicing on a machine in his basement gym decorated with photographs of his kids in boats. He was in active U.S. Marine Corps duty from 1981 to 1984, going to Beirut after a suicide bomber killed 220 Marines in October 1983. Even if the service taught him decisiveness, he says he wasn’t “in one of those situations where the Marine Corps changed my life.” In 1986 he graduated from the Kennedy School of Government at Harvard, where he lived with his friend Peter Fisher, later head of fixed income at BlackRock (BLK), the world’s largest asset manager.
Mudd became president of GE Capital’s Asia-Pacific wing in 1996, five years after joining the General Electric (GE) unit. He was promoted in time for the region’s own financial crisis, when Mudd’s group took advantage of lower prices to invest and expand, Bloomberg News reported in 1998. “They made a lot—a lot—of money,” says Tisch, the Loews portfolio manager.
Mudd shared a view of himself during a congressional hearing after the housing collapse in 2008. “Do I expect sunny days? No,” he told the House Committee on Oversight and Government Reform. “I went to Asia when the 1998 crisis hit. I went to Beirut when there was shooting there. People say that I like it too much when it’s not a sunny day.”
Congress created Fannie Mae in 1938 to boost homeownership, with the idea that buying mortgages from lenders would supply them with cash for new loans. By 2000, when Mudd joined as vice chairman, it was a for-profit public company with the government’s implicit backing and an obligation to support affordable housing. The lobbyists and consultants who helped protect Fannie Mae and Freddie Mac’s government backing included former Federal Reserve Chairman Paul Volcker and former House Speaker Newt Gingrich. These government-sponsored entities paid well, with James Johnson, Fannie Mae’s CEO in the 1990s, making about $100 million there before becoming head of the Goldman Sachs (GS) compensation committee, where he remains.
Johnson’s successor Franklin Raines was ousted in an accounting scandal, with the firm admitting it overstated earnings by $6.3 billion from 2001 to 2004, the year Raines helped create the University of Virginia’s corporate ethics institute. Mudd became interim Fannie Mae CEO that December. “He did what a Marine would do, I think, which was to stay there and try to get it fixed,” says J. Noel Williams, a friend and Marine who trained with him at Camp Lejeune. “If he had bailed, he would’ve not had all the challenges.”
In June 2005, when Mudd was promoted to president and full CEO, executives saw a “stark” choice between taking more risk or facing lower profits, according to the congressionally appointed Financial Crisis Inquiry Commission. The firm pushed into lower-documentation loans and other risky products that year “without adequate controls in place,” one Federal Housing Finance Agency examination said later. According to the FCIC’s 2011 report, Fannie Mae embraced risk to improve market share, meet Wall Street’s growth expectations, and ensure high pay—with Mudd earning about $24 million in taxable compensation from 2006 to 2008, the SEC says.
In 2007, Fannie Mae’s internal five-year strategy plotted out its move “deeper into the credit pool,” underlining the plan to “take and manage more mortgage credit risk” even as it cited the weakening housing market across the country. In a note to another colleague cited by Senate investigators, Chief Risk Officer Enrico Dallavecchia called the firm’s risk-control processes some of the weakest he’d “ever witnessed.” Then he e-mailed Mudd to say he was upset about hearing in a board meeting that the firm supported taking more risk even as it was planning to cut his department’s budget. “My experience is that email is not a very good venue for conversation, venting or negotiating,” Mudd wrote back, telling his risk officer to “address it man to man.” He ended the e-mail with an invitation to “see me today face to face.” Dallavecchia, now his co-defendant in the SEC suit, told the FCIC he’d been tired and oversensitive.
Under Mudd, Fannie Mae’s push into risky U.S. home loans was ambitious. With foreclosure rates hitting records in 2007, the Office of Federal Housing Enterprise Oversight noted the firm wanted to capture a fifth of the subprime market, according to the FCIC. Its report describes the Fed discovering insufficient reserves and massive potential losses inside Fannie Mae after agreeing in July 2008 to provide it emergency loans.
“Partly he’s the victim of circumstances, but partly he made his own bed because of the strategy the company continued to pursue until basically it was put into conservatorship,” says Lawrence White, a Freddie Mac board member until 1989 who teaches economics at New York University.
Eventually, Fannie Mae and Freddie Mac couldn’t raise equity capital from public or private markets. By August 2008, Treasury Secretary Henry Paulson feared a collapse causing a run on the U.S. dollar or halting the global economy, according to his memoir. Mudd gave an interview near the end of the month to the public radio host Diane Rehm. Fannie Mae’s subprime “rounds out to about zero percent of our overall book,” he told her. The U.S. government put his firm into conservatorship less than three weeks later.
“I did my best to lead you honestly and honorably,” Mudd said in his departing message to employees. He told them they had “worked longer and harder, and accomplished more, than many thought possible.”
The SEC isn’t suing Mudd for failing to predict the crisis. Instead, the SEC alleges that Mudd and two former colleagues, Dallavecchia and Executive Vice President Thomas Lund, deceived investors, saying the firm had $8 billion of subprime exposure when the total topped $100 billion. “I know what process we used to figure out what we were going to disclose,” Mudd says. “And we disclosed it.” Mudd’s two colleagues also deny the complaint’s allegations.
Photograph by Cliff Owen/AP Photo
The suit alleges that the firm’s filings left out exposure to around $341 billion of reduced-documentation loans called Alt-A. One possible explanation for a gap the size of the Danish economy is the quirkiness of classification, with different reasons to label loans in different ways changing over time and place. Loan definitions were “a bit squishy,” says Thomas Stanton, a former FCIC member. No matter how they were catalogued, risky loans helped destroy the firm, according to his committee’s report. Since Fannie Mae and Freddie Mac were put into conservatorship in September 2008, they’ve drawn more than $187 billion from the U.S. Treasury.
Mudd, meanwhile, says he’s already been held to account. “I didn’t predict the collapse of the mortgage market—I was the CEO of a mortgage company, my mistake,” he says. “Don’t blame anybody else for that. Lost my job, got no bonus, got no severance, got no parachute, got no options, said, ‘That’s the way it goes.’ Packed up, sold my house, moved to another town and another job—accountable.”
Mudd became CEO of Fortress Investment Group (FIG) in August 2009. “I certainly believe that Dan Mudd is a very decent guy,” says Peter Briger, a co-chairman of the firm, the country’s first publicly traded private equity and hedge fund manager.
The SEC sued Mudd and his two Fannie Mae colleagues, along with three Freddie Mac executives, in December 2011. Within days, he announced a leave of absence from Fortress. He resigned the following month. “It’s politics,” he says. “The SEC was under pressure to file cases.” He sees public resentment toward Wall Street as the product of caricature and stereotype. Mudd told JPMorgan Chase (JPM) Chairman and CEO Jamie Dimon to keep his chin up, sending a note after the firm’s multibillion-dollar trading loss last year.
With discovery for his trial not scheduled to close before next year, friends have told him that an ongoing securities fraud suit makes it almost inconceivable for him to lead a public firm. Mudd has come to see that as a good thing. “I’m not missing doing earnings calls, I’m not missing doing Sarbanes-Oxley certification,” he says. “I’m not missing doing mandatory meetings.”
Sitting in a Midtown Manhattan tavern wearing Nubian-coin cuff links, he describes projects and consulting roles. “I think you can go, ‘I resent this and this is a way station,’ or you can say, ‘I do this, and find this is really interesting, and I enjoy it.’ ”
As a consultant for Loews, Mudd was “able to simplify things for us that on paper looked very complicated,” Tisch says. Mudd says he’s working on new projects: a potential biotechnology deal he won’t describe and an entrepreneurial venture to help develop an airport and related infrastructure in a West African country. Among his partners is Tom Gibson, a friend and former Reagan administration press official. They decline to specify the country, with Mudd saying it’s “not a revolutionary place, but it’s in a tough neighborhood.”
A few weeks later, Mudd’s barbecuing ribs on his back patio when his wife gets home. “Hi, sweetie—burning down the house,” he says, nodding to smoke wafting indoors. They’ve talked to their two older children about his case. He says he told his daughters, “You’ll have to for the first time in your life make a judgment about whether what you see and feel and hear in your own family and your own knowledge of your father and your parents is true, or whether something somebody says to you randomly is true. And you can make your own decision.”
Denying Mudd’s dismissal request in August, U.S. District Judge Paul Crotty cited billions of dollars of loans from Countrywide Financial that weren’t fully disclosed as subprime, despite apparently meeting Fannie Mae’s own criteria. John Nester, a spokesman for the SEC, declined to comment for this story.
The defense says Fannie Mae had provided the government and investors the relevant data and bountiful credit warnings, according to court documents, and that classifying loans as subprime depended on specific origination and process details.
In the meantime, the government-sponsored entities have revived. Fannie Mae, reporting a record quarterly profit in May as home prices rebound and delinquencies fall, announced a new $59.4 billion payment to the Treasury. That brings its total payments since 2008 to $95 billion, though it counts as a return on government investment, not as a repayment, because of bailout terms. White House budget analysts predict that payments by the firm and Freddie Mac could eclipse the aid they’ve received by $51 billion in 2023.
Mudd imagines his Marine Corps friends crediting the military for his present state of mind. That, he says, would be incorrect. It comes from a stable childhood, when he knew he was “going to be loved, and you’re going to have dinner and you’re going to have a warm bed,” he says. “As long as you behaved in an honorable way.”
Mudd says he wakes up each morning and gives it his all, as he always has. “And if it doesn’t work out it won’t be for lack of trying, it won’t be for lack of honesty, it won’t be for lack of analysis, it just didn’t work out. And that’s not totally different than the way I view Fannie Mae.”