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Fannie Mae Fined $400M for Bad Accounting
"The image of Fannie Mae as one of the lowest-risk and 'best in class' institutions was a facade," James B. Lockhart, OFHEO's acting director, said in a statement as the report was released. "Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing."
The report also faulted Fannie Mae's board of directors for failing to discover "a wide variety of unsafe and unsound practices" and to act independently of Raines.
  The Report of the Special Examination of Fannie Mae conducted and released the Office of Federal Housing Enterprise Oversight, Tuesday, May 23, 2006, in Washington. (AP Photo/Haraz N. Ghanbari) (Haraz N. Ghanbari - AP) Save & Share |
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From 1998 to mid-2004, the smooth growth in profits and precisely hit earnings targets that Fannie Mae reported each quarter were "illusions" deliberately created by senior management using faulty accounting, the report says.
The Bush administration has been pushing for legislation to reduce the massive mortgage portfolios of Fannie Mae and its smaller government-sponsored sibling, Freddie Mac.
The report "shows that Fannie Mae's faults were not limited to violating accounting and corporate governance standards, but included excessive risk-taking and poor risk management as well," Randal Quarles, Treasury undersecretary for domestic finance, said in a statement. "OFHEO's findings are a clear warning about the very real risk the improperly managed investment portfolios of (Fannie Mae and Freddie Mac) pose to the greater financial system."
Fannie Mae said its board has read the report and is committed to making the changes required under the deal with the regulators.
"We are glad to resolve these matters. We have all learned some powerful lessons here about getting things right and about hubris and humility," Mudd said in a statement. "We are a much different company than before. But we also recognize that we have a long road ahead of us."
The accounting manipulation tied to executives' bonuses occurred from 1998 to 2004, according to the report, a much longer period than was previously known. It "made a significant contribution" to Raines' compensation, which totaled more than $90 million from 1998 to 2003, the report says, including some $52 million directly tied to the company hitting earnings targets.
OFHEO levied a record $125 million fine in 2003 against Freddie Mac for misstating earnings _ mostly underreporting them _ by $5 billion for 2000-2002.
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Freddie Mac: http:/
Office of Federal Housing Enterprise Oversight: http:/
Securities and Exchange Commission: http:/