Former Freddie Mac Chief Risk Officer Warned Chief Executive Of Pending Financial Crisis

August 5, 2008 9:52 a.m. EST

Washington, D.C. (AHN) - The former chief risk officer of Freddie Mac said Monday the financial crisis that is besetting the second largest mortgage lender in the U.S. could have been averted had its chief executive listened to internal warnings.

David Andrukonis, the chief risk officer in 2004, told the company's chief executive Richard Syron that the firm's purchase of bad loans may cause "enormous financial and reputational risk to the company and the country."

Aside from Andrukonis, two other Freddie Mac officers had sent a memo to Syron informing the chief executive its underwriting standards were falling below benchmarks and it was exposing Freddie Mac to losses, the New York Times quoted Andrukonis.

Despite the warnings, the mortgage lender continued to purchase subprime loans because Syron could not say no to anyone, Andrukonis explained. Looking back, Andrukonis questioned whether he should have taken the job. The chief risk officer resigned in 2005 and eventually became a teacher.

After the mortgage crisis had affected the nation and even the global financial community, shareholders and industry observers said Syron and Fannie Mae chief executive Daniel Mudd should have been replaced.

In his defense, Syron told the New York Times the company needed to balance the needs of its shareholders with federal regulators.

Freddie Mac and Fannie Mae are expected to continue reporting losses until the first quarter of 2009 as home loan delinquencies continue to increase, according to industry analysts.

Moshe Orenbuch, analyst of Credit Suisse, told Bloomberg Freddie Mac is expected to report a $1.9 billion loss in credit-related costs, while Fannie Mae will report a $2.4 billion loss. Freddie Mac's quarterly loss is expected to hit $388 million or $0.60 a share, while Fannie Mae's quarterly losses would top $763 million or $0.74 per share.