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Regulator Has No Confidence in Fannie Leadership

By David S. Hilzenrath
Washington Post Staff Writer
Friday, September 24, 2004; Page E01

Federal regulators told Fannie Mae's board that they doubted the ability of the mortgage company's current management to correct the extensive problems found in a probe of the company's accounting and internal controls.

"[W]e must consider the accountability of management and whether we have sufficient confidence in management to . . . bring about broad cultural and operational changes in the areas of concern," Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, wrote in a letter his agency released yesterday. The regulators' findings "make it difficult to assert such confidence," Falcon said.

OFHEO Director Armando Falcon Jr. wrote that findings go beyond accounting interpretations. (David Scull -- Bloomberg News)

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The government-chartered company has been led since 1999 by Franklin D. Raines, budget director in the Clinton administration.

OFHEO last year forced Fannie's direct competitor, Freddie Mac, to replace chief executive Gregory J. Parseghian and its general counsel during an investigation of accounting manipulations at Freddie.

In a regulatory filing yesterday, Fannie Mae reported that at the behest of OFHEO it amended the employment agreements of Raines and two other top executives, Chief Operating Officer Daniel H. Mudd and Chief Financial Officer J. Timothy Howard, in the last week to make it easier for them to be fired, which can reduce their severance benefits.

OFHEO tried to block $50 million in compensation to Leland C. Brendsel, another ousted Freddie Mac chief executive, but a federal judge recently ruled the agency didn't have the authority to do so.

An OFHEO official said the changes in the three executives' employment contracts had been in the works before the critical report and Falcon's Monday letter.

Howard came in for heavy criticism in the 198-page report OFHEO issued late Wednesday. The report accused Fannie of using improper accounting to smooth fluctuations in its earnings, tolerating weak internal controls, having a "dysfunctional" system for making accounting policies, and failing to adequately investigate a former employee's allegations of an intentional accounting misstatement. Those problems called into question Fannie's financial safety and soundness, the report said.

Regulators have been negotiating with Fannie directors over steps that Falcon has said must be taken to protect the safety and soundness of the company.

Fannie Mae presiding director Ann McLaughlin Korologos quoted from Falcon's letter in a news release Wednesday, but her statement did not include some of the regulator's sharpest comments. The company was not commenting publicly yesterday.

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