By Svea Herbst-Bayliss and Katya Wachtel
(Reuters) - Daniel Mudd, the embattled former chief executive of mortgage financing company Fannie Mae, is taking a leave of absence from him current job as head of hedge fund Fortress Investment Group
Last week the Securities and Exchange Commission charged Mudd and other top executives at Fannie Mae and Freddie Mac with understating the lenders' exposure to risky subprime mortgages.
Now he has announced plans to step down for the moment and the company tapped a co-founder, Randal Nardone, to take over.
"I have requested a leave of absence from my position as chief executive officer to ensure that any time or attention I need to focus on matters outside of Fortress will not affect the business or operations of the company, Mudd said in a statement.
Mudd, who had been forced out at Fannie Mae, said last week that he would fight the SEC charges, and Fortress said the matter was not having an impact on Fortress's operations.
But its share price, under pressure all year, sank even lower this week as investors worried about his future and outside analysts speculated that Mudd's presence might become a further liability for the company.
In mid-morning trading on Wednesday the shares were 1.2 percent lower at $3.30, leaving them down 41 percent for the year. Rival Och Ziff, another one of the small number of publicly traded hedge funds, has lost more than 47 percent this year.
"The bigger issue facing the firm right now, more so than a departure of Dan Mudd, is the performance issues in the private equity business and the liquid hedge funds," said Campbell Anthony, an analyst at Macquarie. "This isn't a big event in our view because Mudd is not a key man. We would be much more concerned if something were to happen to portfolio managers like Wes Edens or Michael Novogratz or Peter Briger."
"We doubt Mudd leaving will cause any kind of redemptions at an LP level," Anthony added.
Mudd, who came to New York-based Fortress in 2009 with a mandate to develop the company's global growth strategy after co-founder Wes Edens had run the company since its public stock listing in 2007, said it was his choice to step back. He did not say how long he would be gone and the company turned to another co-founder, Nardone, a trained lawyer, to run it.
"We are grateful to Dan for his service and leadership over the past two and a half years and support his decision to take a leave of absence at this point in time," said Nardone in an company statement. "We look forward to Dan`s return in the hope that matters are resolved favorably and expeditiously."
While the move is meant to improve the outlook for Fortress, which oversees some $46 billion in assets, it may raise more questions than it answers, industry experts said.
"With this leave, people will ask the board what was their rationale in bringing Dan Mudd on," said Charles Elson, director of the University of Delaware's Center for Corporate Governance, "And the board will have to explain its thinking," he added.
Given the troubles at Fannie Mae, Elson and others said it was a relevant concern for the hedge fund company's board to look closely at the cloud hanging over Mudd.
"Because someone has a problem at one place doesn't mean they will have one at the next place. But it does put you on notice to be careful in bringing that person on board," Elson said. "It is something to be concerned about."
When Mudd came in he was supposed to free up Edens and the other founders to concentrate more on running the company's hedge fund portfolios, which had been hurt during the global financial crisis.
Now the original team will have to have to take the reins back, several industry analysts said.
"The founders have a major investment in the firm and they want to protect it, so they need to step back in and it would not be reassuring for investors if they did not. That would be expected in any money management firm in a leadership crisis. They need to step in and right the ship, " said Chris Tobe, a principal at Stable Value Consultants and a trustee of the Kentucky state pension fund.
However, those executives have a balancing act to play, said Macquarie analyst Anthony.
"Investors want individual portfolio managers to be focused on their specific businesses. That's why Fortress brought Mudd in, in the first place."
(Reporting By Svea Herbst-Bayliss in Boston and Katya Wachtel in New York; Editing by Dave Zimmerman and Steve Orlofsky)