- The Washington Times - Wednesday, December 6, 2006

ASSOCIATED PRESS

Fannie Mae erased $6.3 billion in profit in a long-awaited restatement yesterday, capping the accounting scandal that stunned financial markets and brought the ouster of top executives and a record fine against the government-sponsored mortgage leader.

The correction of its earnings from 2001 through June 30, 2004, ordered by the Securities and Exchange Commission two years ago, was well below Fannie Mae’s earlier estimate of $10.8 billion.

The reworking of its accounting is costing the company about $1 billion this year to conduct. It is the first earnings statement filed by Fannie Mae, which finances one of every five home loans in the United States, since late 2004.

The scandal erupted in the fall of that year when federal regulators accused Washington-based Fannie Mae — with its long-standing prestige, vaunted political clout and reputation for financial excellence — of serious accounting problems and earnings manipulation to meet Wall Street targets.

Fannie Mae yesterday announced an increase in its quarterly dividend to 40 cents from 26 cents.

Its chief executive officer, Daniel Mudd, received a pay package of $13.1 million, including a $2.6 million bonus, for 2005, the company also disclosed in an SEC filing. Mr. Mudd, who was the top operations official at the time of the accounting misdeeds, was elevated to the top position in a management shake-up in December 2004.

Last May, the federal agency that regulates Fannie Mae and Freddie Mac, its smaller sibling in the $8 trillion home-mortgage market, issued a blistering report charging a six-year accounting fraud at Fannie Mae, the second-largest U.S. financial institution after Citigroup Inc. Regulators said the scheme included manipulations to reach quarterly earnings targets so that company executives could pocket hundreds of millions in bonuses from 1998 to 2004.

Fannie Mae paid a record $400 million civil fine in a settlement with the Office of Federal Housing Enterprise Oversight (OFHEO) and the SEC.

While the 2001-2004 restatement marks a significant step, “They still have a way to go” to make Fannie Mae’s financial reports current to the present time, said Armando Falcon, who was the director of OFHEO for six years until mid-2005. “If Freddie Mac is any indication, those two years won’t be easy. … There’s still a lot of hard work to go,” he said.

Freddie Mac, which also is government sponsored and has its stock publicly traded, had its own accounting scandal that came to light in June 2003. The company misstated earnings by about $5 billion — mostly underreported — for 2000-2002 to smooth out volatility in profit and uphold its image on Wall Street as a steady performer.

Over the past two years, Fannie Mae has disclosed a number of new accounting problems that had been uncovered in several areas, including its core business of issuing securities backed by the billions of dollars of home mortgages annually that it buys from lenders and bundles for resale to investors worldwide. Other problems were revealed in loans, houses acquired through foreclosures, interest on delinquent home loans and reverse mortgages.

They all were in addition to the accounting-rule violations that came to light in September 2004 involving derivatives, the financial instruments that Fannie Mae and Freddie Mac use to hedge against swings in interest rates.

Fannie Mae’s Chief Executive Officer Franklin D. Raines, a prominent Washington figure who was White House budget director in the Clinton administration, was swept out of office in December 2004 along with Chief Financial Officer Timothy Howard.

The current OFHEO director, James B. Lockhart, has said his agency was considering suing former executives to recover tainted bonus money if Fannie Mae failed to recoup it.

Fannie Mae escaped criminal prosecution over the accounting failure. The Justice Department had pursued a criminal investigation, but federal prosecutors said in August that they had shut down their probe without bringing any action. The SEC still could bring civil actions against individual executives, including people no longer at Fannie Mae, with the burden of proof less stringent than in criminal prosecutions.

Fannie Mae and Freddie Mac were created by Congress to pump money into the home-mortgage market in order to keep interest rates low and make homeownership affordable for low- and moderate-income people.

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