In their first public response to regulators' allegations that the company manipulated its books, executives of mortgage funding giant Fannie Mae plan to defend its accounting and say the actions regulators have criticized involve interpretations of complicated rules.
"These accounting standards are highly complex and require determinations over which experts often disagree," Fannie Mae chairman and chief executive Franklin D. Raines says in written testimony prepared for delivery at a congressional hearing today and made available to The Washington Post.
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Some of the regulators' findings "involve highly detailed issues that I would not normally focus on in my role as CEO," Raines says.
Raines says the company strongly disagrees with the allegation that it willfully violated accounting rules to maximize executive bonuses in 1998, according to the testimony.
"What we want to demonstrate is that we intended to do the right thing and we took care to do the right thing," Raines says.
Some of the accounting involved inherently imprecise estimates of the way consumers would respond to changes in interest rates, Raines says. "Given these imprecisions, Fannie Mae decided to use a range of possible outcomes."
In a report last month, regulators said Fannie manipulated its accounting to present a stable pattern of earnings and tolerated weak internal controls to obscure manipulations. In 1998, regulators alleged, Fannie improperly delayed booking $200 million of expenses, enabling Raines and other top executives to receive their maximum bonuses, a total of $27.1 million.
As a matter of policy, Fannie allowed itself considerable discretion to postpone some of its income or expenses each fiscal quarter, the regulators said.
The Office of Federal Housing Enterprise Oversight, Fannie's primary regulator, blamed Fannie's corporate culture and questioned the ability of Fannie's management to correct the problems. The agency accused Chief Financial Officer J. Timothy Howard of providing inadequate oversight and wearing multiple hats that contributed to a breakdown of checks and balances.
Along with presiding director Ann McLaughlin Korologos and OFHEO Director Armando Falcon Jr., Raines and Howard are scheduled to testify today before the House capital markets subcommittee.