Fannie Mae’s Financial Crisis
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JEFFREY BROWN: Top officials of home mortgage giant Fannie Mae appeared before Congress today, their first public defense of recent allegations that they’d cooked their books. Fannie Mae is an unusual financial institution, a publicly traded company that also has a federally chartered mission to help make home ownership more widely available. But a recent report by a federal regulator raised questions about Fannie’s accounting and management. Louisiana Republican Richard Baker, chairman of the House capital markets subcommittee, called the hearing to order.
REP. RICHARD BAKER: It is indeed a very troubling report, but is a report of extraordinary importance not only to those who wish to own a home, but as to the taxpayers of this country who would pay the cost of the clean-up of an enterprise failure.
JEFFREY BROWN: Regulator Armando Falcon, head of the Office of Federal Housing Enterprise Oversight, known as OFHEO, testified first. Among the key allegations in his report are that Fannie Mae officials manipulated the numbers to paint a false picture of its overall finances, to appear to have consistent and stable earnings, and to meet targets that would boost managers’ own bonuses.
ARMANDO FALCON: It wasn’t just a matter of these rules being too complex. They understood rules. They chose not to follow them. These accounting principles have to mean something, Mr. Chairman, that it should apply to every company equally; no one gets special treatment.
JEFFREY BROWN: Falcon suggested that top managers at Fannie Mae might need to be changed. Christopher Shays of Connecticut noted that Fannie has long been a powerful political player in Washington.
REP. CHRISTOPHER SHAYS: And I am tempted to ask how many people in this room are on the payroll of Fannie Mae, because what they do is they basically hire every lobbyist they can possibly hire. They hire some people to lobby and they hire some people not to lobby so that the opposition can’t hire them.
JEFFREY BROWN: But several Democrats also questioned whether regulators had adequately made their case, and cautioned against moving too quickly.
REP. GREGORY MEEKS: Executive bonuses. That’s a very serious charge, and I don’t know exactly how you back this up. Can you just tell me how do you back this up?
SPOKESMAN: You look at the circumstances the company deferred this $200 million of expenses in disagreement with the auditor, and the evidence seemed to us that it was, in order to meet these compensation bonus targets.
JEFFREY BROWN: This afternoon, Fannie Mae executives got their turn. Chairman and CEO Franklin Raines said accounting standards are complex and open to interpretation, and he denied all the allegations.
FRANKLIN RAINES: Importantly I would note that the OFHEO report does not cite any documents or witnesses to support these allegations. Upon reading of this allegation in the report, the company undertook to assemble the relevant facts. And we’ve learned of no facts and no other materials that support the allegation that decision about the amounts of books was related to bonuses. I want to make one thing very clear. I’ve always tried my best to ensure that our company does the right thing in the right way. And I believe to this day that we did. If, however, after a thorough review of all the facts, it’s determined that our company made significant mistakes, our board and our shareholders will hold me accountable. And I will hold myself accountable. That comes with being a CEO; I accepted that burden on the day I took the job and I accept it today.
JEFFREY BROWN: Raines, a prominent Democrat who served as President Clinton’s budget director was questioned on many issues, including management pay.
SPOKESMAN: Let me ask you, besides the bonuses, you offer stock options as well?
FRANKLIN RAINES: We are a shareholder-owned company, and we pay according to what our statute provides.
SPOKESMAN: Is that a yes?
FRANKLIN RAINES: We pay comparably to other companies and we use stock options among the various things in our executive compensation.
SPOKESMAN: Do you dispute the amount of $245 million over the last five years as bonuses? That’s a lot of money. It’s a quarter of a billion dollars. A nodding of the head doesn’t get transcribed.
FRANKLIN RAINES: I have to go calculate the number. It’s a number that’s calculable.
SPOKESMAN: Do you think it’s in the ballpark?
FRANKLIN RAINES: It could be. You say it is a very large number. In the last five years, we’ve probably had after-tax income of $30 billion.
SPOKESMAN: I know you have a very successful company.
FRANKLIN RAINES: So it’s a tiny percentage of our revenue, a tiny percentage of our profit.
JEFFREY BROWN: Since the regulators allegations became public, Fannie Mae’s stock has dropped more than 15 percent. The Securities and Exchange Commission and Justice Department have also launched probes of the company.