Senators Grill Fannie Mae Chief
Mudd Tells Panel He Was 'Shocked' by Accounting Problems

By David S. Hilzenrath and Annys Shin
Washington Post Staff Writers
Friday, June 16, 2006

Fannie Mae chief executive Daniel H. Mudd came under fire yesterday from members of a Senate committee who questioned how he could have been unaware of the company's alleged accounting fraud.

Mudd was chief operating officer during the years in which regulators have concluded that the housing finance company manipulated its accounting to maximize executive bonuses.

"I'm astounded you would even stay with this institution," Sen. Chuck Hagel (R-Neb.) told Mudd at a hearing of the Senate Banking Committee. "Have you thought about resigning?"

Mudd, who was promoted after the accounting scandal cost Franklin D. Raines the combined job of chairman and chief executive, said he did not like "the old Fannie Mae" any more than Hagel did and was "as shocked as anyone" when Fannie's accounting problems came to light.

Mudd said he thought about leaving but is "not a quitter" and stayed to fix Fannie's problems.

Hagel countered that Mudd's $8 million compensation package last year might have had something to do with the decision.

Yesterday's hearing was held to review a report by the Office of Federal Housing Enterprise Oversight, which detailed widespread accounting violations and described an executive culture fixated on hitting bonus targets.

OFHEO Director James B. Lockhart III, who also was confirmed in his job by the Senate yesterday, said during a break in the hearing that as far as his agency was concerned, whether Mudd should keep his job remained an open question.

In a settlement with the Securities and Exchange Commission and OFHEO, Fannie recently agreed to pay penalties of $400 million. The SEC and the Justice Department still are investigating the conduct of individual executives.

Raines and outgoing audit committee Chairman Thomas P. Gerrity declined invitations to testify yesterday.

Board Chairman Stephen B. Ashley, a director of the company since 1995, also faced sharp questioning.

"I think you failed, the entire board failed. . . . Now, can you sit there and tell this committee that you knew nothing about what was going on?" Hagel asked.

Ashley replied that he felt "deep disappointment and anger" that the trust the board placed in Fannie Mae's management was "not just broken but shattered."

Some committee members said the regulators' findings showed why the full Senate should take up long-stalled legislation to strengthen oversight of Fannie and its competitor Freddie Mac, which were chartered by the government to provide a steady flow of funds for home mortgages. But other committee members said the Senate should avoid overreacting and possibly harming the companies.

In prepared testimony yesterday, Mudd said the days "of arrogant, defiant, 'my way' Fannie Mae had to end." He said the company supported creation of a strong new regulator and would work with lawmakers.

Sen. Richard C. Shelby (R-Ala.), chairman of the Banking Committee, said he saw no sign of that.

"When are you going to start?" Shelby asked. "We haven't seen any evidence of any changes in tone that you talked about."

Legislation to strengthen oversight of Fannie Mae and Freddie Mac has been stalled in the Senate since last summer. Lawmakers are at loggerheads over a provision that would empower regulators to reduce the companies' investment holdings. Those mortgage-related investments have grown enormously over the past decade, becoming a major source of profit while making the companies more vulnerable to interest-rate fluctuations.

Executives for Fannie and Freddie have defended the investment portfolios, calling them essential to fulfilling the companies' mission to keep money flowing into the housing market.

The new OFHEO director yesterday provided fodder for the companies' critics, agreeing that the investments do not affect mortgage interest rates or the availability of conventional mortgages.