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False Signatures Aided Fannie Mae Bonuses, Falcon Says

By Kathleen Day and Terence O'Hara
Washington Post Staff Writers
Thursday, April 7, 2005; Page E01

Fannie Mae employees falsified signatures on accounting transactions that helped the company meet earnings targets for 1998, a "manipulation" that triggered multimillion-dollar bonuses for top executives, a federal regulator said yesterday.

Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, said the entries were related to the movement of $200 million in expenses from 1998 to later periods. The result of the changes was an increase in Fannie Mae's 1998 earnings per share and the release of a $27.1 million bonus pool for senior executives.

Rep. Richard H. Baker, right, who headed the House hearing on Fannie and Freddie, with Paul E. Kanjorski (D-Pa.). (Ken Cedeno -- Bloomberg News)

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Fannie Mae reported paying the following executive bonuses in 1998: chairman and chief executive James A. Johnson received $1.932 million; Franklin D. Raines, chairman-designate, received $1.11 million; Chief Operating Officer Lawrence M. Small received $1.108 million; Vice Chairman Jamie S. Gorelick received $779,625; Chief Financial Officer J. Timothy Howard received $493,750; and Robert J. Levin, an executive vice president, received $493,750.

Raines and Howard were ousted by the Fannie Mae board in December after the chief accountant of the Securities and Exchange Commission agreed with OFHEO's criticism of the company's accounting, including the 1998 bonus maneuver. He directed the company to correct financial statements, a move that could wipe out $9 billion in reported profit dating to 2001.

Falcon, during congressional testimony and in comments afterward, publicly drew a link for the first time between the falsified signatures, which his agency disclosed last month, and the accounting manipulations that led to bonuses, which OFHEO disclosed in the fall. A Fannie Mae employee has told investigators that financial records from 1999 to 2002 bore his name and signature but were not prepared by him, Falcon testified.

"We have identified several problems involving procedures for preparing, reviewing, authorizing and recording" Fannie Mae's accounting, Falcon said. His office has said it is sharing all information from its probe with the Securities and Exchange Commission and the Department of Justice.

Falcon said OFHEO has ordered Fannie Mae to determine whose signatures were falsified, why, and whether any executives who received bonuses as a result of the transactions knew about them or the circumstances leading up to them. He would not disclose the names of the employees interviewed, the names used in the falsified signatures or who might have signed the names.

"We're looking into who did it and how far up it went," Falcon said. He made his comments during and following a hearing by a House Financial Services subcommittee, as Congress prepares to consider legislation that would create a new regulator for Fannie Mae and its smaller rival, Freddie Mac.

A spokesman for Fannie Mae, Charles V. Greener, said the company had no comment. Lawyers for Raines and Howard did not return telephone calls seeking comment on whether they knew about the falsified signatures or other problems Falcon cited. Small declined to comment. Gorelick did not return a phone message. The company would not make Levin, who still works there, available.

Falcon said his office obtained testimony from an employee in Fannie Mae's controller's division indicating the employee would change the books when asked, even though he often did not understand the purpose of the changes. OFHEO is investigating the extent and circumstances of those changes, Falcon said.

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