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Fortress CEO Mudd Says Goodbye for Now

Following news that the SEC is suing him for his role at troubled mortgage lender Fannie Mae, Fortress Investment Group CEO Daniel Mudd is taking a leave of absence from the company.

The announcement today that Fortress Investment Group CEO Daniel Mudd is taking a leave of absence from the $43.6-billion-in-assets publicly traded alternative investment firm should hardly come as a surprise. Last week the Securities and Exchange Commission took the unusual step of filing a lawsuit against Mudd, former CEO of the Federal National Mortgage Association (Fannie Mae to you and me), and Richard Syron, former CEO of the Federal Home Loan Mortgage Corporation (Freddie Mac), alleging that both understated the subprime mortgage losses of the two publicly traded mortgage lenders by hundreds of billions of dollars.

It was always going to be difficult to ride out such a suit, and today Mudd released a statement saying he is taking a leave of absence from Fortress to “ensure that any time or attention I need to focus on matters outside of Fortress will not affect the business of operations of the company.”

So that’s goodbye, for now at least.

It is not as if Fortress didn’t know the risks when it hired Mudd as CEO in August 2009 after three-plus years as CEO of the troubled federal mortgage lender. In March of this year Mudd received a Wells Notice from the SEC—basically the commission’s way of saying, “We’re looking at you”—alleging that he misled investors during his years at Fannie Mae. Mudd said at the time that he would rebut the allegations.

More interesting is the fact that Fortress—which certainly knows its way around the mortgage market—hired Mudd in the first place. Mudd was on the board of Fortress, which operates both hedge funds and private equity funds and was the first major alternative investment firm to go public in the U.S., in February 2007. According to what he told me when I met with him during the reporting for my story on Peter Briger Jr.’s credit hedge fund group at the firm (“Fortress Investment Group’s Junkyard Dogs”), in 2009 Mudd was considering a position at a different firm that would have necessitated his resignation from the Fortress board. When he called Wesley Edens, Fortress’ co-founder and acting CEO at the time, to break the news, Edens and Briger suggested that Mudd come on board as Fortress CEO instead.

Fortress wanted someone in that seat. Going public right before the collapse of the global markets, its passage as a publicly traded firm had not been—and still isn’t—easy. The CEO responsibilities were being handled by Edens and the other partners, taking time away from their focus on investing. As CEO, Mudd had nothing to do with the investment side of Fortress’s business.

Fortress also needed someone who could act as a negotiator between the firm’s strong-willed partners, including Briger, Edens, who oversees private equity, and Michael Novogratz, head of the liquid markets hedge fund business—and a giver of great quotes. (My favorite line in our November article on Fortress is Novogratz on the difference between himself and Briger: “Someone will come into my office, and after they leave I’ll think “What a nice guy,” they walk into Pete’s office, and Pete is thinking ‘How is this guy going to screw me.’”)

Mudd played the arbitrator role well. It helps that he has a long relationship with Briger, going back to when the two worked together in Asia in the late 1990s. Arguably Mudd’s most important achievement at Fortress has been to have helped the partners negotiate a new five-year partnership agreement, announced this summer and due to go into effect in 2012, removing any concerns that the firm would break up when the existing agreement ends.

Now, Fortress needs someone strong to take Mudd’s place. Issues at the firm still remain. While Briger’s credit funds have performed well in 2011 and the private equity business is improving, the stock is trading at around $3.30 a share, down from a high of $33 in April 2007. One potential candidate: Randal Nardone, a principal and cofounder of the firm, who has stepped in as interim CEO.

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