Fannie report lays blame at the topSays 'arrogant and unethical' culture led employees to lie about earnings for high bonuses; recommends review of current management.CNN Money
May 23, 2006
SourceWASHINGTON (Reuters) - Fannie Mae's "arrogant and unethical" corporate culture led employees to massage earnings to trigger bonuses for senior executives, and the board of directors contributed by failing to act independently, the company's regulator said Tuesday.
The Office of Federal Housing Enterprise Oversight said in its report on Fannie's nearly $11 billion accounting scandal that it would announce a settlement. Sources briefed on the plan have said that the mortgage giant would pay $400 million.
The 340-page report laid out a litany of accounting problems and failures by Fannie Mae's management and directors, including current Chief Executive Officer Daniel Mudd.
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.
OFHEO also said a large number of Fannie's accounting practices and policies did not conform with generally accepted practices. According to the report, Fannie overstated income and capital by about $10.6 billion, in line with the estimates of the company's potential restatement.
"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.
"Fannie Mae's board of directors contributed to those problems by failing to be sufficiently informed and to act independently of its chairman, Franklin Raines, and senior management, and by failing to exercise the requisite oversight over the enterprise's operations."
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.
Mudd and current managementOFHEO said Fannie Mae should review any current executives mentioned in report. CEO Mudd was among those mentioned.
Mudd, the report said, ran afoul of the company's code of business conduct by not going to the board's audit committee with concerns about the company's accounting expressed by an employee in 2003.
The report also said Mudd "missed an opportunity" to recognize the similarities between Fannie's practices and accounting problems at sibling company Freddie Mac.
Freddie's problems led to a $5 billion profit restatement.
Also mentioned were Chief Operating Officer Michael Williams, Chief Business Officer Robert Levin, Executive Vice President Peter Niculescu and Linda Knight, executive vice president for capital markets.
Fannie's shares were not yet freed to trade. The stock closed Monday at $50.27.