- The Washington Times - Tuesday, May 23, 2006

1:18 p.m.

Employees at D.C. mortgage giant Fannie Mae manipulated accounting so that executives could collect millions of dollars in bonuses as senior management deceived investors and stonewalled regulators at a company whose prestigious image was phony, its federal regulator charged today.

The blistering report by the Office of Federal Housing Enterprise Oversight, the product of an extensive three-year investigation, was issued as the government-sponsored company struggles to emerge from an $11 billion accounting scandal.

Fannie Mae said it is being fined $400 million to resolve the accounting manipulation to facilitate executives’ bonuses, in a settlement with the housing oversight agency.

“The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,” James B. Lockhart, the acting director of OFHEO, said as the report was released. “Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing.”

The report also faulted Fannie Mae’s board of directors for failing to exercise its oversight responsibilities and failing to discover “a wide variety of unsafe and unsound practices” at the largest buyer and guarantor of home mortgages in the country.

The OFHEO review, involving nearly 8 million pages of documents, details what the agency calls an arrogant and unethical corporate culture. From 1998 to mid-2004, the smooth growth in profits and precisely hit earnings targets each quarter reported by Fannie Mae were “illusions” deliberately created by senior management using faulty accounting, the report says.

The accounting manipulation tied to executives’ bonuses occurred from 1998 to 2004, according to the report, a much longer period than was previously known.

Regulators had earlier said that Fannie Mae in 1998 improperly put off accounting for $200 million in expenses to future periods so executives could collect $27 million in bonuses.

“By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders,” the report says. The manipulation “made a significant contribution” to the compensation of former Chairman and Chief Executive Franklin Raines, which totaled more than $90 million from 1998 to 2003, it says, including some $52 million directly tied to the company hitting earnings targets.

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