Fannie Mae leadership is the part that's dysfunctional

September 29, 2004|By JAY HANCOCK

FANNIE MAE boss Franklin Raines stood before a bunch of stock analysts in June at New York's Waldorf-Astoria, acknowledged concerns about his company's accounting and regulation, and apropos of almost nothing defended his performance as one of America's most powerful and well-compensated executives.

"Ask yourselves, is there someone else that you would rather have managing this issue than the folks who've been traditionally at Fannie Mae?" Raines asked.

Maybe he didn't really want an answer. But he may get one now.

A regulator's finding of "pervasive" accounting problems at Fannie, the government-chartered mortgage giant, ought to doom Raines, who was President Clinton's budget chief and has long been one of America's most powerful and untouchable executives.

He and other top Fannie executives hope their jobs will be saved by an agreement announced Monday implementing reforms they long resisted. If any sanity remains inside the Capital Beltway, they hope in vain. The question should not be whether Raines and his chief financial officer, Timothy Howard, will stay. The question should be how much severance they'll cart away and what happens next.

The Office of Federal Housing Enterprise Oversight determined that Fannie's accounting-policy process was "dysfunctional and ineffective," its operating controls "weak or nonexistent," its culture of manipulating earnings "deeply ingrained."

Fannie's accounting shenanigans, which are still being plumbed, raise questions not only about the company's reported profits, but also about the financial soundness of an enterprise whose $1 trillion in assets makes it too big for the government to let fail.

The OFHEO report found that Raines & Co. basically picked the earnings result they wanted for a particular quarter and then figured out which accounting principles to apply to get there. The overriding concern, OFHEO said, was to give shareholders predictable results, regardless of what was going on in reality.

Sometimes Fannie amortized costs different ways with varying assumptions until it got the result it wanted. The company made "discretionary adjustments" to the books "for the sole purpose of minimizing volatility and achieving desired financial results," OFHEO said.

Fannie ignored an internal whistle-blower who raised questions. It deferred a $200 million charge that it should have taken in 1998, "which had significant effects on executive compensation," the agency said.

It isn't clear whether, or to what extent, Raines was personally involved in the irregularities, but he was the guy in charge.

Bookkeeping irregularities at Freddie Mac, Fannie's Mae's government-chartered competitor, led to an executive purge there last year. Shortly afterward, Raines said, "Unlike Freddie Mac, we didn't do any of these things."

A Japanese CEO in Raines' position might be thinking about seppuku just now, or at least resigning, apologizing and crying for TV cameras. But Raines is dug in.

The danger is that OFHEO's focus on boosting Fannie's capital and other reforms will distract from the need for new bosses. The accounting issues, as it happens, are only the start of Fannie's problems.

Over the years, "the folks who've been traditionally at Fannie Mae," as Raines refers to them, have taken advantage of a virtual regulatory vacuum to amass a $2 trillion mountain of owned and guaranteed mortgages, balanced it on a banana peel of capital and derivatives and put the U.S. taxpayer underneath with a rescue net.

They've exploited the perception of having a government guarantee for its debt by borrowing money at ultra-low rates but refused to pass most of the savings to the U.S. homeowners whom they're supposed to help. Most of the multibillion-dollar government subsidy goes to Fannie Mae shareholders in the form of profits and to insiders' huge salaries, according to the Congressional Budget Office.

They've failed to help minority and low-income homeowners as much as they could, and they've used a formidable lobbying machine to fend off efforts to regulate them more tightly.

They don't pay state or local taxes. For years they didn't even have to file financial disclosures with the Securities and Exchange Commission.

Fannie's problems go beyond accounting and ultimately beyond personalities. But fresh faces at the top would go nicely with the improved capital ratio.

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