Book Cooking 101... By Fannie Mae

"Embattled mortgage giant Fannie Mae is expected to be fined between $300 million and $500 million over the alleged manipulation of accounting so that executives could collect millions in bonuses, in a settlement to be announced Tuesday."

"One of the individuals confirmed the anticipated civil fine against Washington-based Fannie Mae, the largest buyer and guarantor of home mortgages in the country, which was first reported Monday evening by The Wall Street Journal Online."

"According to regulators, Fannie Mae in 1998 improperly put off accounting for $200 million in expenses to future periods so executives could collect $27 million in bonuses."

"The deal with the Office of Federal Housing Enterprise Oversight and the
Securities and Exchange Commission comes as the government-sponsored company struggles to emerge from an $11 billion accounting scandal."

"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."

"The report also is said to conclude that Fannie Mae's board failed in its oversight responsibilities and to maintain its independence from the company's former chairman and chief executive, prominent Washington figure Franklin Raines."

"Documents cited in a report released earlier this year show that top-level management was focused on the $200 million deferral and meeting earnings targets that would trigger the payment of full bonuses."

"By deliberately and intentionally manipulating accounting to hit earnings targets, senior management was able to maximize their bonuses," the new report by OFHEO says, according to an individual who has seen it.

“‘The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,’ James Lockhart, the acting director of OFHEO, said. ‘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.’”

"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."

It said Fannie (Research) used its enormous political power in Washington to lobby Congress in an effort to interfere with OFHEO’s examination of the company’s accounting problems.

“Fannie Mae’s ‘arrogant and unethical’ corporate culture led to an $11 billion accounting scandal at the mortgage giant, federal regulators said Tuesday in announcing a $400 million settlement with the company.”

“‘A combination of factors led Fannie Mae senior management, through their actions and inactions, to commit or tolerate a wide variety of unsafe and unsound practices and conditions,’ the report said.”

“OFHEO said Fannie’s corporate culture encouraged a false perception that the company took so little risk and was so well managed that it could hit announced earnings per share precisely almost every quarter. That view, OFHEO said, led to the belief that senior executives deserved to be handsomely compensated for the company’s ‘extraordinary performance.’”

“The regulator found that $52 million of former Chief Executive Raines’ $90 million in compensation was linked to earnings. ‘The OFHEO 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,’ said Treasury Undersecretary Randal Quarles.”

"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."

"The regulators are expected to recommend that the company review the executives' actions with an eye to possibly firing or disciplining them, they said."

"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."