Fannie Mae's stock took another beating yesterday after reports that the Justice Department had opened a criminal investigation of the giant mortgage finance company's accounting.
The share price fell 4.3 percent yesterday to its lowest point since August 2003.
Federal prosecutors in the U.S. attorney's office in the District have begun a probe into possible wrongdoing at the government-chartered financial institution after receiving the findings of an examination by financial regulators, sources familiar with the inquiry said.
The Office of Federal Housing Enterprise Oversight last week issued a report that said Fannie manipulated its earnings to make them appear more predictable. The stock, which closed at $63.40 a share yesterday, was trading at almost $80 in February and above $77 earlier this month.
Two of Fannie's top executives -- chairman and chief executive Franklin D. Raines and vice chairman and Chief Financial Officer J. Timothy Howard -- are still planning to testify at a hearing next week by the House subcommittee that oversees Fannie Mae, company spokesman Brian Faith said. In addition, director Ann McLaughlin Korologos, who heads a special committee of the board appointed to examine the regulator's findings, has agreed to testify, Faith said.
Asked if they would invoke their constitutional right not to answer questions at the hearing, Faith declined to comment.
The federal criminal investigation, which the Wall Street Journal reported yesterday, is at its earliest stages, said the sources, who spoke on condition of anonymity because of the sensitive nature of the probe.
Defense lawyers pointed out that the five-year statute of limitations has expired on an accounting move that regulators say was designed to help Fannie executives release $27 million in bonuses in 1998. But criminal authorities could get around the statute of limitations issue by alleging that there was a broad, ongoing conspiracy to manipulate Fannie's earnings and enrich company officials, legal experts said.
The Securities and Exchange Commission and lawmakers at the House Financial Services subcommittee overseeing the government-chartered company had already begun investigating Fannie. Justice Department spokesman Bryan Sierra declined to comment, as did Channing Phillips, an official in the U.S. attorney's office in the District.
"We do not have knowledge of the DOJ inquiry, so I can't comment further," Faith said.
One of the nation's largest and most complex financial institutions, Fannie was chartered by the government to provide a steady flow of funds for home mortgages. It borrows money from investors and buys mortgages from banks and other mortgage lenders. It also packages mortgages into securities for sale to investors.
Longtime Washington lawyers said Fannie's predicament is puzzling because the company had for months operated under heightened scrutiny because of its special government status and the well-publicized problems of its cousin, Freddie Mac.
"If they had been on top of this, they could have prevented it and looked like heroes," said former SEC chairman Harvey L. Pitt. "It doesn't matter whether any of this is true, it really matters who was on top of it and who was looking at the problem."
In the bond market, Fannie's borrowing costs rose somewhat yesterday relative to the U.S. Treasury's, but not as dramatically as other major companies' when they were in the midst of similar problems, traders said.
Though traders have been seeing "flashbacks of HealthSouth, WorldCom and the rest of the deadbeats," they also saw Freddie Mac weather an accounting scandal last year, which has helped Fannie avoid a sharper reaction, said Sean Horrigan, vice president of government agency bond trading at Legg Mason Inc.
"People are nervous right now," and investors are bracing for more of the unpleasant news reports that traders refer to as "tape bombs," said Michael Yarian, a trader at Barclays Capital Inc. in New York.
Fannie's regulators are also under the magnifying glass. At the request of Sen. Christopher S. Bond (R-Mo.), the inspector general at the Department of Housing and Urban Development has been investigating OFHEO Director Armando Falcon Jr.'s public comments on the review of Fannie Mae while it was in progress earlier this year, said a senior member of the Senate Appropriations Committee staff who would not be named because he said it was not his place to speak publicly.
One of the key sources for OFHEO's report, Roger L. Barnes, a former manager in Fannie's controller's office, declined through attorney Debra S. Katz to comment.
Katz said she had made a formal request to Fannie Mae earlier this week to permit Barnes to speak to the press. Katz said Fannie rejected that request the next day. Katz declined to comment on whether Barnes is under any post-employment agreement with Fannie. Barnes spoke to the New York Times last week.
Barnes left the company in November 2003, after first raising concerns internally about Fannie's accounting practices in July.
Fannie spokesman Faith declined to comment on whether Barnes is under any restrictions about what he can say to the media about Fannie Mae. "Roger Barnes is free to talk to Congress, OFHEO or any other government entity that wants to talk to him, and we strongly encourage him to do so," Faith said. Barnes is scheduled to testify at the Oct. 6 House hearing.
Staff writers Terence O'Hara and David A. Vise contributed to this report.