Skip to comments.Fannie Mae Manipulated Accounting (Trading Halted)
Posted on 05/23/2006 9:17:32 AM PDT by AdamSelene235
WASHINGTON (AP) -- Employees at mortgage giant Fannie Mae manipulated accounting so that executives could collect millions in bonuses as senior management deceived investors and stonewalled regulators at a company whose prestigious image was phony, a federal agency charged Tuesday.
The blistering report by the Office of Federal Housing Enterprise Oversight, the product of an extensive three-year investigation, was issued as the government-sponsored company struggles to emerge from an $11 billion accounting scandal.
Earlier, a person familiar with the situation said that Fannie Mae was being fined between $300 million and $500 million for the alleged manipulation of accounting to facilitate executives' bonuses, in a settlement with the housing oversight agency.
"The image of Fannie Mae as one of the lowest-risk and 'best in class' institutions was a facade," James B. Lockhart, the acting director of OFHEO, 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 exercise its oversight responsibilities and failing to discover "a wide variety of unsafe and unsound practices" at the largest buyer and guarantor of home mortgages in the country.
The OFHEO review, involving nearly 8 million pages of documents, details what the agency calls an arrogant and unethical corporate culture. From 1998 to mid-2004, the smooth growth in profits and precisely-hit earnings targets each quarter reported by Fannie Mae were "illusions" deliberately created by senior management using faulty accounting, the report says.
The accounting manipulation tied to executives' bonuses occurred from 1998 to 2004, according to the report, a much longer period than was previously known.
Regulators had earlier said that Fannie Mae in 1998 improperly put off accounting for $200 million in expenses to future periods so executives could collect $27 million in bonuses.
"By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders," the report says. The manipulation "made a significant contribution" to the compensation of former chairman and chief executive Franklin Raines, which totaled more than $90 million from 1998 to 2003, it says, including some $52 million directly tied to the company hitting earnings targets.
Fannie Mae employees falsified signatures on accounting transactions that helped the company meet the 1998 earnings targets, according to congressional testimony by the former director of OFHEO. The agency first discovered in 2004 the accounting-rule violations and alleged earnings manipulation by Fannie Mae to meet Wall Street targets -- disclosures that stunned the financial markets.
In December 2004, the SEC ordered Fannie Mae to restate its earnings back to 2001 -- a correction expected to reach an estimated $11 billion. The Justice Department has been pursuing a criminal investigation.
Raines and former chief financial officer Timothy Howard were swept out of office by Fannie Mae's board in December 2004.
OFHEO levied a record $125 million fine in 2003 against Freddie Mac, Fannie Mae's smaller rival in the multitrillion-dollar home mortgage market, for misstating earnings -- mostly underreporting them -- by $5 billion for 2000-2002.
On Friday, Fannie Mae said it was replacing the chairman of its board's audit committee, a key position as the second-largest U.S. financial institution reworks its accounting and struggles to emerge from the scandal. The company said the board had named accounting professor Dennis Beresford to replace audit committee chairman Thomas Gerrity.
Employees at mortgage giant Fannie Mae manipulated accounting so that executives could collect millions in bonuses....
That's it. Impeach Bush!
Another great Clinton appointee: Franklin Raines. This guy would steal hot soup if he had rubber pockets.
My word, if the stock reopens today it should fall like a brick through air.
Anyone surprised by this announcement, stand on your head.
By some incredible miracle, the Bush Administration has actually taken the correct position on this issue.
People need to go to jail.
Now they investigate Fannie's evil sister, Sallie.
A business is not human, therefore it cannot be "greedy". Place the blame squarely where it belongs - on unethical and probably criminal top management joes.
By the standards of the NYSE this company should have been delisted for lack of a financial statement many many quarters ago.
Anyone could have told you this was going on based on Raines actions at the top....
I am sure the MSM will be all over the greed and corruption in this case just like they were in the Enron case. /sarcasm
I really prefer mine medium rare.
Any word on when we can expect to see an indictment? Or is the fix in on that, as well?
Nope. But I don't think the boys can get away with this. It's a public company and the government will prosecute. Even DOJ would have trouble screwing up this case.
I wonder what Mr. Raines did with his ill-gotten bonus money?
someone needs to mention clinonista Jamie Gorelick.
Hell, we've given corporations human rights, why not human attributes?
Good question - however, individuals profiting from political connections shouldn't be excused by blaming the entity instead of the individual.
The high and mighty covering their Fannie--so the John Q. Public can't cover his.
As with many banks and other institutions, their reserves were allowed to go to (almost) zero.
The Fed investigated this last fall, it could have already failed and been propped back up although we may never know the full story.
A Fannie Mae public failure would prompt an 1800s style financial panic, trillions of dollars of mortgage securities and derivatives up in smoke.
Rex, it gets worse,
IF my memory is correct at the same time part of their legal team was none other than Jamie Gorelick, correct me if I am wrong on this.
I wonder how much of that money was funneled back intothe Clinton's campaigns.
Executive 1998 1999 2000 2001 2002 2003 Totals
Franklin Raines $1,109,589 $1,890,000 $2,480,625 $3,125,625 $3,300,000 $4,180,365 $16,086,204
Daniel Mudd n/a n/a $735,130 $1,083,109 $911,250 $1,288,189 $4,017,678
Timothy Howard $493,750 $518,500 $544,425 $694,983 $781,250 $1,176,145 $4,209,053
Thomas Donilon n/a n/a n/a $562,751 $600,000 $727,070 $1,889,821
Robert Levin $493,750 $518,500 $544,425 $686,028 $575,000 $801,237 $3,618,940
Jamie Gorelick $779,625 $818,675 $859,609 $1,083,109 $911,250 n/a $4,452,268
James Johnson $1,932,000 n/a n/a n/a n/a n/a $1,932,000
Lawrence Small $1,108,259 $1,163,672 n/a n/a n/a n/a $2,271,931
Raines, Gorelick, and Donilon were all politically-appointed and well connected Democrats.
Perhaps 50 years in jail, and every penny given back in restitution (no matter how they've distributed it to other family members) might send a message.
Between Enron and now Fannie Mae, I'm starting to wonder how many other big businesses there are where this type of stuff is going on.
There is a definite downside to having stock prices and quarterly earnings as the be-all and end-all of business and the economy. It creates a huge incentive to fudge the data.
None of these people have exactly gone into hiding though. I saw Frank Raines sitting right on the floor during the Wizards-Cavaliers games. You would think he would not have the nerve to show his face again in Washington.
Sounds like more "good capitalism" to me.
Trading resumed a few minutes ago, with FNM currently down about 25¢ from yesterday's close of 50.27.
Extremely heavy volume (a day's worth in just a few minutes) defending the $50 line.
Jamie Gorelick got a HUGE BONUS for being on this board!! Will they go after Franklin and Jamie? Doubt it!
Correct, TD. In 2002 Gorelick was Fannie Mae's vice-chairman. Uh-oh.
In a 2002 interview with "Business Week" magazine, Gorelick said that Fannie Mae and Freddie Mac's assets were 'managed safely."
Thank you, President Clinton.
So horrible news is released and massive volume supports the share price.
Do you ever get feeling that.....nah...couldn't be.
You can also read more reports Here
Much of this is the Scrooge McDuck Syndrome; they have no use for the money, but it's so much fun to collect.
You really don't want to know. The incentive to fudge the books is so great, that a little "creative accounting" is seen not only as acceptable but as expected. A buddies wife does forensic accounting, and you wouldn't believe some of the things she sees.
Instead of fining Fannie Mae, why don't they seize the assets of these unscrupulous executives and imprison both them and the accountants who doctored the books. Fine the outside auditors and their companies and give them some jail time too.
Jamie Gorelick of FBI "Able Danger" and 9/11 comission fame wrote the legal guidelines for Fannie Mae.
She was an ACLU porn lawyer before becoming a Clinton appointee and justice dept official.
... and how much of it he had to kick back and to whom ...
Raines will never join Lay, Kowalski, and the guy from Worldcom as the poster boys for unethical business for one obvious reason. Of course, one is not allowed to say what it is.
You don't think old Franklin kept his? Do you suppose he kept it in his freezer?
This was Democrat (meaning socialist) hacks and operatives who plundered Fanni Mae. Not businessmen.
I looked at the equity to debt ratios and fannie is levered 10 times more than freddie from what I can tell.
May I, in the friendliest way possible, suggest that you read up on the FTCM debacle in 1998 (couple of good books, not to mention an article or two of mine(g!)).
The lesson to be learned here, aside from internal corruption (which, oddly enough, LTCM weren't, they were straight-as-a-string traders until they got in over their heads), is this:
When it comes to portfolios that are heavily involved in high-leverage derivatives, ordinary business school stats such as debt-equity are 100% meaningless. Why? Because neither potential debt nor actual equity can be measured by any 'hard' methodolgy. One must deal (perhaps undesirably) with econometric models, and therefore the solvency of any such enterprise as these is dependent ENTIRELY on the accuracy of the model in use.
If overgearing (over-leveraging, in American English) can kill off an organisation of the smartest men, best traders, and finest theoreticians in the history of the world, then it can and will, one day, kill off a bunch of mediocre MBAs who couldn't find work in the private sectore, and almost surely much more quickly than such a policy killed off the 'smart guys'.
Fan, Fred, and Sal are all in this boat right now, have been for years AND their leverage has grown over the years, not shrunk (as it EFFING SHOULD HAVE, particularly after March 2000). The yield curve is going against them. These were ill-conceived ''quasi-private'' corporations to start, and they all operate under the **assumption** -- nothing written in law at all -- that if they get BIG enough, and subsequently fail, we taxpayers will be on the hook.
Sod them. Fannie was more blatantly corrupt (still is, I daresay), and violated its charter more than Freddie.
And they are both (as is Sallie) far too leveraged to withstand ANY sort of hiccup in their very curious derivatives exposure...absent of course the Regress bailing their sorry asses out with your and my money.