Fannie Mae's Repairman
Wednesday, November 16, 2005
Daniel H. Mudd roams the halls of Fannie Mae's Wisconsin Avenue headquarters in his shirt sleeves. He has set aside several hours every month when employees can talk to him on a first-come, first-served basis. He eschewed the lavish second-floor executive office in favor of more modest space downstairs without wood paneling or a fireplace.
Mudd's main job as Fannie's chief executive may be to repair the company's relationships with its regulators, customers and shareholders, steer it through a $10.8 billion restatement, and overhaul its accounting systems.
But the toughest part of his assignment may be changing the culture of Fannie Mae. Mudd, 47, has vowed that the company that emerges from the crisis will no longer be known as an imperious bully that relied on a vast lobbying network to battle critics and keep its regulatory oversight weak.
Mudd sees accessibility as an antidote to the years of insular thinking that many inside and outside the company point to as a major reason for Fannie Mae's troubles.
It is a strategy of small gestures, such as visiting the company's federal regulators and apologizing to Congress for Fannie's accounting manipulations. Mudd engaged the company's harshest critics, recently lunching with Peter J. Wallison, co-author of a book on the benefits of taking away Fannie Mae's government charter. Mudd even persuaded Rep. Richard H. Baker (R-La.), who has led a five-year crusade to bring the company under tighter government scrutiny, to speak at a dinner for the Fannie Mae national advisory council last month. In his introduction, Mudd likened Baker's appearance to President Richard M. Nixon visiting China, Baker recalled.
The detente with Baker, who says Fannie had threatened to sue him just a year earlier, was the culmination of a goodwill tour Mudd embarked on when he became interim chief executive in December. The company's chief operating officer for the prior five years, he said the accounting scandal "meant internally we didn't have a clear and realistic picture of where the company was with our customers or our regulators or our stakeholders or employees or Congress."
"The right place to find that answer was not through shutting the doors and huddling and navel-gazing," Mudd said last week in his most extensive interview since taking the company's top job. "It was to open the doors and get out and ask people bluntly, right up front . . . 'What have we gotten wrong?' "
To right itself, Fannie Mae needed "facts rather than a set of beliefs about who we thought we were," said Mudd, a former Marine and a son of noted television journalist Roger Mudd.
Facing up to facts has been a painful exercise. Just last week, the company disclosed additional accounting errors, this time related to how it accounted for a mortgage insurance policy, investments in low-income housing and investments in synthetic fuel partnerships.
More bad news is on the horizon. Fannie's board has hired the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP to produce an independent report on its accounting problems, expected out in January. It will be followed by a report from the company's chief regulator, the Office of Federal Housing Enterprise Oversight. The Securities and Exchange Commission and federal prosecutors are also investigating accounting practices that regulators allege were used to conceal losses and shuffle earnings to boost financial results -- which in turn triggered executive bonuses.
Created by Congress during the Great Depression to help keep money flowing to the housing market, Fannie Mae buys mortgages from banks and other lenders, providing money for them to make more loans. It holds some of those mortgages as investments but packages most of them into securities that it sells to investors around the world. Along with rival Freddie Mac, it finances nearly half of the home mortgages in the United States.
Until the various reports and investigations are complete, Mudd will face doubts about his own culpability. Prior to becoming chief executive, Mudd's high-ranking position under then-chief executive Franklin D. Raines prompted people inside and outside the company to question his credentials for challenging the status quo.