Study Finds 'Extensive' Fraud at Fannie Mae

By Kathleen Day
Washington Post Staff Writer
Wednesday, May 24, 2006

Fannie Mae engaged in "extensive financial fraud" over six years by doctoring earnings so executives could collect hundreds of millions of dollars in bonuses, federal officials said yesterday in a report that portrayed a company determined to play by its own rules.

Regulators at the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight, in announcing a settlement with Fannie Mae that includes $400 million in penalties, provided the most detailed picture yet of what went wrong at the congressionally chartered firm.

They portray the District-based mortgage funding giant -- a linchpin of the nation's housing market -- as governed by a weak board of directors, which failed to install basic internal controls and instead let itself be dominated and left uninformed by chief executive Franklin Raines and Chief Financial Officer J. Timothy Howard, who both were later ousted.

The result was a company whose managers engaged in one questionable maneuver after another, including two transactions with investment banking firm Goldman Sachs Group Inc. that improperly pushed $107 million of Fannie Mae earnings into future years. The aim, OFHEO said, was always the same: To shape the company's books, not in response to accepted accounting rules but in a way that made it appear that the company had reached earnings targets, thus triggering the maximum possible payout for executives including Raines, Howard and others.

The settlement closes regulators' civil probe into Fannie Mae's accounting scandal, the result of the company's misstating earnings by about $10.6 billion from 1998 through 2004.

SEC Chairman Christopher Cox and acting OFHEO director James B. Lockhart III said they now will turn their focus to individuals, including Raines and Howard, to determine what role former and current executives played in the accounting fraud and if they should be forced to forfeit millions of dollars in what the regulators called "ill-gotten" compensation. They said the Justice Department is continuing a criminal probe.

"Fraudulent financial reporting cheats investors of their savings," Cox said. "Those whose actions led to the accounting fraud you've heard described today will be vigorously pursued."

Lockhart agreed. "You could argue none of it was deserved," he said in response to a question on how much of $52.8 million in bonuses Raines received during the six years might have been linked to improper accounting manipulation. As the settlement was announced, OFHEO released a 340-page report summarizing what it found in its nearly three-year probe of the company.

"The conduct of Mr. Raines, CFO Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae was inconsistent with the values of responsibility, accountability, and integrity," the report said. "Those individuals engaged in improper earnings management in order to generate unjustified levels of compensation for themselves and other executives."

Raines's lawyer Robert Barnett said in a prepared statement that Raines "has repeatedly stated that he never authorized, encouraged, or was aware of violations" of accounting rules. Even so, Raines "strongly believes that, as the leader of Fannie Mae, he should be accountable for what happened within the organization, regardless of personal involvement or fault."

Howard's lawyer had no comment.

Fannie Mae agreed to the settlement with the SEC and OFHEO without admitting or denying guilt. The company is in the midst of trying to create accurate accounting records for the years in question, an undertaking that is costing it hundreds of millions of dollars.

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