An Oct. 7 Business section article incorrectly reported that 21 Fannie Mae executives listed on a chart distributed at a congressional hearing earned more than $1 million in 2002. One name appeared twice on the chart, so only 20 executives earned that amount. The article also incorrectly reported that the compensation totals excluded stock options. (Published 10/11/04)

Fannie Mae chairman and chief executive Franklin D. Raines yesterday criticized the giant mortgage funding company's federal regulator for airing allegations that the company cooked its books so executives could receive bonuses.

"This entire examination has been the most unusual regulatory endeavor I've seen in the 30-some-odd years I've been in this business," Raines told a House subcommittee in his first public response to a critical report by the Office of Federal Housing Enterprise Oversight. "I don't believe there has been an adequate explanation of why they followed this path."

Other financial regulators would have handled the matter in private and announced the resolution instead of disclosing unproven allegations, said Raines, who described the dispute as a matter of conflicting interpretations of complex accounting rules. The release of the report triggered a $14 billion decline in Fannie's stock market valuation, he said.

But Armando Falcon Jr., OFHEO's director, countered in a separate appearance that Fannie Mae deliberately flouted accounting rules to make its earnings growth appear steady and to boost executive compensation.

"The stakes are too high to just forgive past sins," he said at the hearing of the House subcommittee on capital markets. "If any company, especially a government-sponsored enterprise, is allowed to get away with this type of accounting misconduct, then no regulator can do its job and no investor is safe," Falcon testified.

The back-to-back testimony in the day-long hearing showed how battle lines are being drawn in the debate over Fannie's conduct, which has political as well as financial dimensions. Members of the subcommittee took sides.

Some praised and congratulated Falcon for taking on Fannie, which Rep. Christopher Shays (R-Conn.) described as a bully that enjoys advantages and plays by its own rules.

Others suggested that Falcon was trying to redeem his reputation after he and his agency were roundly criticized last year as weak and inattentive for failing to detect billions of dollars of accounting errors and distortions at Fannie's rival, McLean-based Freddie Mac.

And some suggested other motives for the scrutiny of Fannie, whose government-conferred advantages are the envy of other financial services companies that have long lobbied to rein in Fannie through tighter regulation.

"This hearing is about the political lynching of Franklin Raines," said Rep. William L. Clay Jr. (D-Mo.).

The give and take was also marked by a dispute over the decision by subcommittee Chairman Richard H. Baker (R-La.) to disclose previously confidential information about the compensation of 23 Fannie Mae executives.

Fannie had enlisted lawyer Kenneth W. Starr, who led the investigation of President Bill Clinton's relationship with Monica S. Lewinsky, to try to keep Baker from disseminating that information. The chart Baker released showed that 21 Fannie Mae executives each received more than $1 million in 2002, not including stock options. At rival Freddie Mac, seven executives received more than $1 million in 2002, the chart showed.

Raines complained that the information was private and would provide a road map for corporate recruiters trying to raid Fannie's ranks.

But Rep. Barney Frank (D-Mass.), the ranking Democrat on the House Financial Services Committee, said it was appropriate for Baker to release the chart. He said Fannie Mae should serve as a model and should not pay its executives bonuses.

"To the extent that people play games to get bonuses, I am outraged," Frank said. "People making that much money -- let me put it this way -- at the level of compensation of the top officers of Fannie Mae, they should get bonuses if they rush into a burning building and rescue a kid, maybe a cat, but not for doing their job."

Fannie, which says it funds one in every five mortgages in the United States, plays a major behind-the-scenes role in the financial system. Chartered by the government to ensure the availability of home mortgages, Fannie borrows money from investors to buy mortgages from lenders such as banks and savings and loans. It also packages mortgages into securities for sale to investors.

The company, whose brick headquarters on Wisconsin Avenue NW evokes Colonial Williamsburg, had debts of $942 billion as of July 31, and its bonds are widely held by banks and other financial institutions.

As Raines introduced himself to the panel, a symbol of his stature and influence on Capitol Hill was staring down at him. Raines coordinated fundraising for the portrait of former House Financial Services Committee chairman Jim Leach (R-Iowa) that hangs on the wall at the front of the hearing room.

"I'm a brother, a husband, a father and a friend," Raines told the subcommittee, adding that he didn't recognize himself or his company in the comments that some made at yesterday's hearing. He said it was difficult to have to explain the critical regulator's report to his children.

"It's hard when your daughter feels she needs to say to her dad, 'I support you,' " Raines said.

He said he knew of no evidence that bonus considerations influenced Fannie's disputed 1998 accounting decision, and he said he did not participate in determining that accounting.

In a sign of how tense relations have become between the management of Fannie Mae and its regulator, Raines said he did not receive a copy of the agency's report until regulators were walking into a meeting to present it to Fannie's board. Raines said he had tried unsuccessfully to get a meeting with the OFHEO director when he heard that the report was impending.

Falcon said he went directly to the board, bypassing management, because management had resisted the examination and because the findings were so important.

Falcon said Fannie was so slow to cooperate with the examination that his agency issued subpoenas, but Raines said the company was told that OFHEO did that simply to put interviews with Fannie Mae employees on the record. Fannie Mae provided an immense volume of records, including 966,367 pages of e-mails, Raines said.

Rep. Paul E. Kanjorski (D-Pa.) wondered aloud why regulators had not noticed six years ago that Fannie's outside accounting firm, KMPG LLP, had raised questions in an audit report about the particular accounting matter in 1998 that OFHEO linked to the executive bonuses.

Raines said Falcon's office had not raised any of the recent criticisms in earlier annual examinations of Fannie Mae.

As a result of its accounting violations, Fannie could be undercapitalized, but it is not insolvent, Falcon said. He also said that the company's business model is sound and that the problems do not pose a risk to the financial system.

Both sides agreed that the Securities and Exchange Commission will be the final arbiter of the accounting matters.

Ann McLaughlin Korologos, presiding director of the Fannie Mae board, told lawmakers it is too soon to embrace or reject OFHEO's findings. She said Fannie Mae's directors will suspend judgment until an internal inquiry requested by the board is completed.

"The report raises issues that clearly are serious," she said. "I don't want to prejudge. This board can be objective. I commit to you our objectivity."

She praised Raines as a "world-class executive."

Staff writer Kathleen Day contributed to this report.

Franklin D. Raines called OFHEO's probe "the most unusual regulatory endeavor" he had seen.OFHEO Director Armando Falcon Jr., top, said Fannie must not be allowed to get away with its accounting methods. Fannie Mae presiding director Ann McLaughlin Korologos and CFO J. Timothy Howard also testified in front of the House Financial Services subcommittee.