- The Washington Times - Tuesday, May 23, 2006


Senior executives at Fannie Mae manipulated accounting to collect millions of dollars in undeserved bonuses and to deceive investors, a federal report charged yesterday.

At the same time, the Office of Federal Housing Enterprise Oversight and the Securities and Exchange Commission announced a $400 million civil penalty against Fannie Mae in a settlement over the reputed accounting manipulation.

The blistering report by the housing oversight agency, the result of an extensive three-year investigation, was issued as Fannie Mae struggled to emerge from an $11 billion accounting scandal.

Of the fine amount, the $350 million assessed by the SEC — one of the largest penalties ever in an accounting fraud case — will go to compensate Fannie Mae investors damaged by the reputed violations.

The company also agreed to limit the growth of its multibillion-dollar mortgage holdings, capping them at $727 billion, and to make top-to-bottom changes in its corporate culture, accounting procedures and ways of managing risk.

Thirty executives and employees at the company as well as others who have left — including Daniel Mudd, the current president and chief executive officer — will be reviewed for potential disciplinary action or termination.

Washington-based Fannie Mae neither admitted nor denied wrongdoing under the settlement but did agree to refrain from future violations of securities laws.

Although Fannie Mae is a government-sponsored enterprise, it remains a publicly traded company. Taxpayers will not be responsible for paying Fannie Mae’s fines, according to the National Taxpayers Union.

Taxpayers would only be on the hook if Fannie Mae defaulted on its debts and required a government bailout, according to the District anti-tax group.

“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 in a statement 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 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 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.

The manipulation “made a significant contribution” to the compensation of former Chairman and Chief Executive Franklin D. Raines, which totaled more than $90 million from 1998 to 2003, the report says, including about $52 million directly tied to the company hitting earnings targets.

The agency first discovered in 2004 the accounting-rule violations and reputed earnings manipulation to meet Wall Street targets — disclosures that stunned the financial markets.

In December 2004, the SEC ordered Fannie Mae to restate its earnings back to 2001 — a correction expected to reach an estimated $11 billion. The Justice Department has been pursuing a criminal investigation.

Mr. Raines and former Chief Financial Officer Timothy Howard were swept out of office by Fannie Mae’s board in December 2004.

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