False Signatures Aided Fannie Mae Bonuses, Falcon Says
Thursday, April 7, 2005
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.
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.
In his testimony, Falcon also criticized the company's policy of holding mortgage-backed securities for a month before deciding whether to sell them or hold them in the company's own investment portfolio.
"This practice appears to stand in stark contrast to the company's denials of engaging in 'cherry picking' when the matter was reviewed by a 2003 Task Force on Mortgage-Backed Securities Disclosure," Falcon told lawmakers. The task force included officials from OFHEO, the SEC and the Treasury Department.
Fannie Mae's Greener declined to comment on the issue, though the company has denied using its vast nonpublic information base about the home loans it buys to determine which mortgages or mortgage-backed securities to keep or sell. Critics have said use of such inside information is unfair to the broader market Fannie Mae resells to because the company obtains the information through its quasi-government status.
The OFHEO probe began last year following a similar investigation into accounting mistakes at McLean-based Freddie Mac, a scandal that led to the ouster of several top executives there, including two chief executives.
The accounting scandals are being used by Rep. Richard H. Baker (R-La.), chairman of the subcommittee that held the hearing, and the Bush administration to move forward on legislation that would increase oversight and curb the growth of Fannie Mae and Freddie Mac. Baker and others have tried for years to pass such legislation, only to find it defeated by the lobbying efforts of the two companies.
The companies' accounting scandals have bolstered the position of critics, such as Federal Reserve Board Chairman Alan Greenspan. He told the Senate Banking Committee yesterday that the companies' federal subsidies may not benefit homeowners and that the firms' large size and dominance of housing markets could pose a threat to the nation's financial system if they ever fell into trouble.
While there is a general consensus in Congress that Fannie Mae and Freddie Mac need a new, stronger regulator, Greenspan's testimony focused largely on the most controversial aspect of the debate: the size of the companies' portfolios of mortgage assets. Together, the mortgages and mortgage-backed securities that Fannie Mae and Freddie Mac own total $1.5 trillion, a more than tenfold increase in the past 15 years.
The Fed chairman called on Congress to sharply reduce the two companies' massive mortgage portfolios "while we can," saying that without a reduction, they will "inevitably" have major financial problems, causing a crisis in the economy.
Fannie Mae, Freddie Mac and housing industry advocates say the two companies' growing size has strengthened their financial health and improved their flexibility for providing a stable and affordable flow of cash to the home mortgage market -- their congressionally chartered mission.
But Greenspan said the only reason he could find for the vast increase in the companies' balance sheets is to allow Fannie Mae and Freddie Mac to make more money for their shareholders. The companies, , because of their implicit government backing -- what he repeatedly called a "subsidy" -- are able to borrow money at below-market rates and invest the money in market-rate investments. This "spread" between their borrowing costs and what they make on mortgage investments creates a "profit motive" that is at odds with their public mission to provide affordable mortgages and, further, concentrates mortgage investment market risks in two large companies, he said.
Baker's bill calls for giving a new regulator authority to restrict the size of either Fannie Mae or Freddie Mac if the size of the portfolio poses a safety and soundness risk, but it does not call for specific limits or decreases in their balance sheets.
Armando Falcon Jr., OFHEO director, testified yesterday.
Rep. Richard H. Baker, right, who headed the hearing on Fannie Mae and Freddie Mac, with Paul E. Kanjorski (D-Pa.).
Armando Falcon Jr. said OFHEO is looking into how many people knew about falsified signatures.