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Probe Examining Fannie's Promises

Top Executives Are Called Into Question

By Kathleen Day
Washington Post Staff Writer
Thursday, September 23, 2004; Page E01

Fannie Mae chief executive Franklin D. Raines invited reporters to his Wisconsin Avenue headquarters a year ago to complain good-naturedly that recent disclosures of accounting manipulations at smaller rival Freddie Mac had unjustly hurt his company.

"I've jokingly said to friends that I now know what the definition of collateral damage is, and we have suffered a lot of that, I think unfairly," Raines said. "Unlike Freddie Mac, we didn't do any of these things."

When he became chairman and chief executive of Fannie Mae in 1999, Franklin D. Raines promised investors double-digit growth in earnings. (David Scull -- Bloomberg News)

_____FANNIE MAE_____
(FNM) Stock Quote and News
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Company Description
Analyst Ratings
_____Freddie Mac_____
(FRE) Stock Quote and News
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Company Description
Analyst Ratings
_____In Today's Post_____
Report Slams Fannie Mae (The Washington Post, Sep 23, 2004)
Warnings Shadowed Firms' Rapid Growth (The Washington Post, Sep 23, 2004)
Falling Stock
_____On the Web_____
Statement by Ann McLaughlin Korologos -- Presiding Director, Fannie Mae Board of Directors
Fannie Mae Second Quarter 2004 Financial Information (pdf)
Freddie Mac Freddie Mac and Fannie Mae: Understanding the complexities of the organizations that help fund the nation's housing market
_____Related Articles_____
Report Slams Fannie Mae (The Washington Post, Sep 23, 2004)
Mortgage Regulator To Keep Agency Job (The Washington Post, Sep 16, 2004)
Judge Rules Against OFHEO (The Washington Post, Sep 1, 2004)
More Freddie Mac Articles
_____Fannie Mae_____
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Now, the credibility of Raines -- and Fannie Mae Chief Financial Officer J. Timothy Howard -- is being challenged, after yesterday's release of a report by the Office of Federal Housing Enterprise Oversight and news that securities regulators are probing whether Fannie Mae manipulated its financial statements. The probe is also focusing on whether results may have been structured to meet earnings targets that in turn triggered millions of dollars in bonuses for Raines and other top managers.

Raines -- who was head of the Office of Management and Budget under President Bill Clinton -- was not available for comment yesterday. He issued a three-sentence statement through a company spokesman that management would assist a special board committee looking into the regulators' findings.

Howard -- who has been chief financial officer since 1990 under several chairmen, having worked his way up after joining the company as chief economist in 1982 -- also was unavailable, a Fannie Mae spokesman said.

It is Howard who figures most prominently in the regulators' report. They found that Howard provided only incomplete disclosure to the board's audit committee of critical accounting policies now being questioned. The regulators also criticize Howard's multiple roles, saying they did not allow for proper checks and balances. For example, regulators said Howard "was instrumental in setting financial targets as Vice Chairman, and had the authority to meet these targets as Chief Financial Officer."

Particularly of interest to federal investigators at OFHEO, the company's financial regulator, and at the Securities and Exchange Commission, which oversees publicly traded companies, are promises of double-digit earnings growth that Raines made when he became chairman and chief executive of the company in 1999, according to sources familiar with the investigations.

Those goals were approved by Fannie Mae's board in 2000 and "supported by everyone in the company," company spokesman Janice Daue said yesterday. Regulators have worried that such promises could tempt executives to cut corners to meet them, said the sources, who spoke on the condition that their names not be used because the investigations are ongoing.

"What does the future look like for Fannie Mae and our investors?" Raines said in a speech to investors and analysts during his first year in office. He said his predecessor, James A. Johnson, had fulfilled predictions of "double-digit earnings growth" for years, and Raines assured the audience that as the new head of the company, he would preserve that tradition.

"Fannie Mae will continue to deliver double-digit [earnings per share] growth," he said. "In fact, I expect that Fannie Mae's EPS growth over the next five years will match or exceed the average 13.6 percent EPS growth of the past five years."

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