- The Washington Times - Thursday, June 15, 2006


The chief executive officer of mortgage giant Fannie Mae, who was the top operations official at the time of accounting misdeeds, endured pointed questioning yesterday from senators demanding details of his actions.

With Fannie Mae enmeshed in a $11 billion accounting scandal and government pressure on it mounting, President and CEO Daniel Mudd and Chairman Stephen Ashley were keenly on the defensive at a hearing by the Senate Banking Committee.

“I really do find it astounding that neither of you knew what was going on,” said Sen. Chuck Hagel, Nebraska Republican, a longtime critic of government-sponsored Fannie Mae, during a lengthy and bitter exchange with the executives.

“I’m astounded that you would stay with this institution,” Mr. Hagel said to Mr. Mudd. And he suggested that Mr. Mudd should seriously consider giving away to charity the bonus money he received as Fannie Mae’s chief operating officer from 2000 through 2004.

Mr. Mudd was elevated to CEO and president in December 2004 when the board swept Chief Executive Officer Franklin Raines and Chief Financial Officer Timothy Howard from office.

Current and former executives of the company reaped hundreds of millions of dollars in bonuses in a deceptive accounting scheme over six years, federal regulators have charged.

Fannie Mae employees are said to have manipulated accounting to achieve quarterly earnings targets so senior executives could pocket the bonus money from 1998 to 2004.

“Never at any point would I sanction any departure from the rules in order to hit those targets,” Mr. Mudd testified, saying he was unaware of any misconduct, fraud or cheating at the company during the period in question.

“I was shocked and stunned” when the situation came to light in September 2004, he said.

Mr. Mudd became aware as early as the fall of 2003 of an employee’s accusations of accounting misconduct and failed to convey the information to Fannie Mae’s board, according to a report by examiners at the Office of Federal Housing Enterprise Oversight (OFHEO). The report did not draw a conclusion regarding his knowledge of or participation in the accounting manipulations.

Washington-based Fannie Mae, the second-largest U.S. financial institution after Citigroup Inc. and the second-biggest borrower after the federal government, finances one of every five home loans in the country.

Its long-prevailing image of prestige and excellence was a sham, the OFHEO regulators said in the scathing report issued last month, which described what they called an arrogant and unethical corporate culture.

In a settlement announced May 23, OFHEO and the Securities and Exchange Commission (SEC) fined Fannie Mae $400 million — one of the largest civil penalties ever in an accounting fraud case. The company also agreed to temporarily cap its mortgage holdings at $727 billion.

It will take years for Fannie Mae to completely reform and recover from the scandal, the acting director of OFHEO testified earlier at yesterday’s hearing.

Said James B. Lockhart, whose agency also oversees Freddie Mac, the smaller government-sponsored sibling of Fannie Mae: “These companies were so poorly run that it’s going to take many years to fix.”

Freddie Mac had its own accounting crisis in mid-2003, when the company disclosed that it had misstated earnings by some $5 billion — mostly underreported — for 2000-2002, and ousted its top executives.

Mr. Mudd and Mr. Ashley said they are in the midst of a total overhaul of Fannie Mae, which has pledged to complete by year’s end the SEC-ordered restatement of its earnings back to 2001. The anticipated $11 billion correction would be one of the largest restatements in U.S. corporate history.

SEC Chairman Christopher Cox, appearing with Mr. Lockhart, said fraud has resulted in a loss for company shareholders as they’ve watched Fannie Mae stock slide from $75 a share before the scandal came to light in September 2004 to less than $49 currently. A senator estimated the lost market value at around $25 billion.

Mr. Mudd acknowledged yesterday that Fannie Mae had broken a public trust. But he said the company today is nearly unrecognizable from before.

“We have made changes. We are making progress. And we have much more to do,” he testified.

The executives appeared before the panel as pressure mounted from government officials seeking to rein in Fannie Mae’s growth. In addition, OFHEO is pressing Fannie Mae to recover bonus money from some company officials.

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