Fannie chief tells House data weren't manipulated

Oversight agency says accounting was rigged to maximize bonuses


WASHINGTON - Franklin D. Raines, the head of Fannie Mae, the giant mortgage loan holder, took issue with every major damaging conclusion of the company's regulator yesterday in an embattled appearance before a subcommittee of the House of Representatives.

Breaking his silence two weeks after the company's main regulator accused senior executives of manipulating accounting and earnings to get bigger bonuses, Raines said the agency had drawn unfair conclusions, denied the company a fair hearing and inexplicably waged an unusually public campaign against it.

"I want to make one thing very clear," Raines said. "I've tried my best to make sure we've done the right thing in the right way." If he is proved wrong, he said, "our board and our shareholders will hold me accountable. I will hold myself accountable."

The chief executive said, "We've learned no facts to support the allegation in the report that the accounting was undertaken to achieve bonuses," challenging the most important accusation made by the Office of Federal Housing Enterprise Oversight.

Raines offered a different message: that he knew and approved of many accounting techniques at issue, that the company did nothing wrong, and that the regulator over-reached.

For four hours before Raines' appearance, the subcommittee heard details about the case from Armando Falcon Jr., director of the enterprise oversight office. He repeated to the subcommittee the accusation that top management at Fannie Mae had violated accounting rules and engaged in "cookie jar" accounting, dipping into reserves or postponing the recognition of expenses to smooth out quarterly earnings and meet financial projections in order to receive larger bonuses.

Falcon described to the congressional committee a corporate culture at Fannie Mae that fostered the accounting irregularities and said he doubted that the problems could be fixed without a shake-up of senior management. Falcon also said Fannie Mae had refused to comply with requests for documents, forcing regulators to subpoena them. Raines later denied that accusation as well.

Falcon also criticized Fannie Mae's presentation that the accounting issues reflected judgments over ambiguous standards, saying that these were "black and white issues."

"These are not issues that reasonable people will disagree on," Falcon said. "They willfully did not apply accounting rules properly. They understood the rules. They chose not to apply them."

Falcon also said his agency had begun to look more closely at the role played by KPMG, Fannie Mae's outside auditors, and that he had referred the matter to the Public Company Accounting Oversight Board, the new federal agency that oversees the accounting profession.

Some lawmakers applauded Falcon's efforts, especially in the face of much hostile questioning. But others, Democratic and Republican, criticized Falcon.

Raines, who generally was both assertive and patient with his critics, lost his composure only once, when he was asked about the potential impact of the report on his chances of serving in a future Democratic administration.

But Raines blanched when Rep. Richard H. Baker, subcommittee chairman and longtime critic of Fannie Mae, made public a document showing that Raines had received $17.7 million in compensation for 2002, and that 19 other executives each received payments that year of more than $1 million.

The Louisiana Republican said that, over the past five years, the company had awarded $245 million in bonuses, a figure that stunned even Fannie Mae's strongest supporters and seemed to deflate the image long put forward by Raines that the company's sole mission was to provide financing for low- and moderate-income housing.

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