We're Stuck With The Mortgage Monsters

By Jerry Knight
Monday, May 15, 2006

After too many years tilting at Washington's windmills, there are few subjects left that can trigger my feelings of outrage.

Fannie Mae is one of them.

The fall of mortgage giant Fannie Mae -- and its counterpart Freddie Mac -- is the greatest financial tragedy I've witnessed in almost three decades of writing about Washington business.

Once the most respected companies in town, Fannie Mae and Freddie Mac fudged their bookkeeping for years, stretching accounting rules like bungee cords to create fiscal fiction, deceiving shareholders and manipulating the regulatory process.

We still don't know the truth about their finances, but last week we found out how much it is costing Fannie Mae to find out.

Would you believe $800 million?

Not $800 million in mistakes, $800 million just to review the records, find the phony accounting and come up with clean numbers.

That's $800 million this year alone, and it's only an estimate. It includes about $250 million spent in the first quarter and Fannie's best guess of spending for the rest of the year.

Roughly half that, Fannie officials say, is being used to hire outside accountants and attorneys, along with all the paralegal squires and computer handmaidens needed to support them. The other half covers a huge investment in new computer systems, the thousand employees doing temporary duty on the cleanup and countless miscellaneous costs.

The outside-contractor budget comes to $7.7 million a week, enough to hire an army. It's an army recruited by the accounting firm of Deloitte & Touche LLP, which is getting the biggest share of the work.

There are 2,500 employees of outside contractors working on Fannie's books, officials say. The legal team, hired by the board of directors to investigate Fannie's foul-ups, is led by lawyers from Paul, Weiss, Rifkind, Wharton & Garrison LLP. But Fannie has hired several other firms, some just to defend the company against the lawsuits filed by shareholders who lost money on Fannie's stock.

The cleanup crew is so huge that it's taken over the dining room in the company cafeteria, leaving employees to pick up their lunches and eat at their desks. They've taken over every available room in Fannie's headquarters at 3900 Wisconsin Ave. NW, in the office building next door and in the one across the street. The accountants and lawyers are even camped out in the executive suite, including the palatial acreage formerly occupied by chairman Franklin D. Raines, who left after overseeing the scandal.

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