Let’s boil down the Securities and Exchange Commission’s claims last week against six former Fannie Mae and Freddie Mac executives to their essence. Every disclosure that the SEC says amounted to fraud is something the government blessed or turned a blind eye to as it was happening.

So who is holding the regulators accountable for letting these alleged frauds go on? No one, naturally.

To believe the SEC’s lawsuits, you would think the only false and misleading statements the housing giants made before the government took them over had to do with the makeup of their loan books and how much of them were subprime, prime, or what have you. The truth is that Fannie and Freddie engaged in far greater financial-reporting abuses, which couldn’t have happened without the government’s knowledge and cooperation.

Fannie and Freddie continued to maintain they were adequately capitalized, as did their regulator, until they were placed into conservatorship in September 2008. This farce wouldn’t have been sustainable had the two companies been forthright about their earnings and asset values.

One example of their willful blindness had to do with deferred-tax assets, which are valuable only to companies that are making money and paying income taxes. Both companies avoided multibillion-dollar writedowns of these items by insisting they would be profitable for decades to come. The Federal Housing Finance Agency, formerly the Office of Federal Housing Enterprise Oversight, let them get away with this until the end, even while it helped lay the groundwork for the government to take the companies over because their losses had grown too unmanageable.

Getting a Pass

Fannie and Freddie also kept billions of dollars of paper losses on mortgage-backed securities out of their regulatory capital by labeling them as “temporary,” long after it was obvious the values wouldn’t be bouncing back. There, too, the regulator gave them a pass.

Those aren’t the issues the SEC is suing over in its complaints against former Fannie Mae Chief Executive Officer Daniel Mudd, former Freddie Mac CEO Richard Syron and four other former executives. The SEC says the defendants told the world their companies’ subprime-loan holdings were smaller than they really were. The SEC also says the former Fannie executives understated the company’s “Alt-A” loans, where little if any documentation of borrowers’ finances was required.

Mudd, for one, says the government knew everything Fannie was doing -- a point the SEC’s enforcement-division chief, Robert Khuzami, didn’t dispute when asked about it at a news conference last week. “The government reviewed and approved the company’s disclosures during my tenure, and through the present,” Mudd said last week. “Every piece of material data about loans held by Fannie Mae was known to the United States government and to the investing public.”

He’s right, at least about the government part. Consider, for example, what the housing agency’s deputy director, Chris Dickerson, wrote in a 21-page letter to the agency’s director at the time, James Lockhart, shortly before Fannie was seized in September 2008. The letter, which summarized the agency’s examination findings from the previous few years, noted that Fannie had altered the way it reported Alt-A loans in 2006, when it redefined the term and reclassified some mortgages as prime.

Fannie also excluded certain lender programs from its Alt-A metrics, even though the mortgages Fannie acquired through those deals lacked full documentation. “This issue results in inaccurate or incomplete reporting,” said the letter, which was released by the Financial Crisis Inquiry Commission in January. The letter noted that the practices ran afoul of a written directive the housing agency had sent Fannie in April 2007. (Unlike the 2008 letter, the 2007 directive wasn’t made public.)

Loose Usage

The housing agency didn’t stop Fannie from engaging in this sort of conduct before the government took it over. Now the SEC says the Alt-A misclassifications amounted to fraud. If they did, people from government should be held accountable, too.

That Fannie and Freddie used words like “subprime” loosely isn’t in doubt. Fannie’s 2007 annual report said subprime mortgage loans represented less than 1 percent of its single-family business volume that year. The same report showed loans to borrowers with credit scores of less than 620 represented 6 percent of its conventional, single-family business volume. That’s subprime, regardless of what Fannie called it. Mudd and his co-defendants, of course, will point to such disclosures as proof they weren’t hiding anything.

Freddie’s reports included similar figures. There was “no uniform definition” of subprime, Syron’s attorney, Thomas Green of the law firm Sidley Austin LLP, said last week, echoing a line that appeared in Freddie’s financial reports. The SEC says Fannie and Freddie executives underreported subprime numbers even using their companies’ own definitions of the term.

This isn’t what caused Fannie and Freddie to inflate their reported capital. Here we had two of the greatest accounting scams in history, and there’s no mention in the SEC’s complaints of how both companies’ accounting judgments stretched the rules way past the breaking point.

In the meantime, whatever Fannie or Freddie executives might have done to violate the law, they didn’t act alone. The government needs to come clean about its role, too. If ever a scandal cried out for the appointment of an independent examiner or special prosecutor, this is it.

(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net.