Fannie Mae chairman and chief executive Franklin D. Raines yesterday criticized the giant mortgage funding company's federal regulator for airing allegations that the company cooked its books so executives could receive bonuses.
"This entire examination has been the most unusual regulatory endeavor I've seen in the 30-some-odd years I've been in this business," Raines told a House subcommittee in his first public response to a critical report by the Office of Federal Housing Enterprise Oversight. "I don't believe there has been an adequate explanation of why they followed this path."
Franklin D. Raines called OFHEO's probe "the most unusual regulatory endeavor" he had seen.
(Susan Biddle -- The Washington Post)
2 p.m. ET Lawrence J. White, professor of economics at New York University's Stern School of Business, discusses the investigation into accounting practices at Fannie Mae.
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Other financial regulators would have handled the matter in private and announced the resolution instead of disclosing unproven allegations, said Raines, who described the dispute as a matter of conflicting interpretations of complex accounting rules. The release of the report triggered a $14 billion decline in Fannie's stock market valuation, he said.
But Armando Falcon Jr., OFHEO's director, countered in a separate appearance that Fannie Mae deliberately flouted accounting rules to make its earnings growth appear steady and to boost executive compensation.
"The stakes are too high to just forgive past sins," he said at the hearing of the House subcommittee on capital markets. "If any company, especially a government-sponsored enterprise, is allowed to get away with this type of accounting misconduct, then no regulator can do its job and no investor is safe," Falcon testified.
The back-to-back testimony in the day-long hearing showed how battle lines are being drawn in the debate over Fannie's conduct, which has political as well as financial dimensions. Members of the subcommittee took sides.
Some praised and congratulated Falcon for taking on Fannie, which Rep. Christopher Shays (R-Conn.) described as a bully that enjoys advantages and plays by its own rules.
Others suggested that Falcon was trying to redeem his reputation after he and his agency were roundly criticized last year as weak and inattentive for failing to detect billions of dollars of accounting errors and distortions at Fannie's rival, McLean-based Freddie Mac.
And some suggested other motives for the scrutiny of Fannie, whose government-conferred advantages are the envy of other financial services companies that have long lobbied to rein in Fannie through tighter regulation.
"This hearing is about the political lynching of Franklin Raines," said Rep. William L. Clay Jr. (D-Mo.).