David Pauly is a columnist for Bloomberg News. His opinions are his own.
Bloomberg ColumnistsMay 25 2006
SourceFannie Mae -- Arrogant, Chastised and Not Reformed:
David PaulyMay 25 (Bloomberg) -- The Fannie Mae story keeps getting more sordid.
A 340-page report by the company's federal regulator May 23 detailed the sins of the U.S.'s biggest buyer of home mortgages, portraying its management as Team Arrogance and making it clear the company was far from being reformed.
Fannie Mae's board reinforced rather than curbed the culture under former Chief Executive Officer Franklin Raines that issued fraudulent earnings reports and padded executives' income, the investigation by the Office of Federal Housing Enterprise Oversight found.
Daniel Mudd, chief operating officer from 2000 to 2004 and Raines's successor as CEO, failed to properly investigate claims of misconduct brought to him by other Fannie Mae employees, the report said.
Executives in the Office of the Chairman refused to give directors unrestricted access to Fannie Mae managers, according to Ofheo. And Ann Kappler, senior vice president and general counsel until last December, made ``false and misleading'' statements to Fannie Mae's audit committee, the report said.
What's more, Ofheo said company representatives tried to get members of Congress to stymie the probe into Fannie Mae's accounting misdeeds, which now stand at $11 billion and may go higher.
Fannie Mae's lobbying efforts in Washington often met with success. The report cited a 2004 memo from Mudd to Raines, saying the ``old political reality was that we always won, we took no prisoners and we faced little organized political opposition.''
Paying the Price
In atonement for its misbehavior, Fannie Mae agreed to pay $400 million -- $50 million to the U.S. government and $350 million to a fund for defrauded Fannie Mae shareholders.
Ofheo also ordered the company to limit its mortgage portfolio to the level at the end of 2005, which was $727 billion. Congress may now legislate curbs on Fannie Mae and its rival Freddie Mac, which in 2003 announced its own $5 billion accounting scandal. Both companies were created by the government to stimulate the mortgage market by purchasing mortgages, giving lenders money to make new loans.
The best move would be to order the two giants, which own or guarantee about 40 percent of all U.S. mortgages, to break up into four or five separate companies. That would reduce the risk to the mortgage market should one company get into financial difficulty and avert a massive bailout by taxpayers in a collapse.
Changing Faces
Following the accounting disclosures, Fannie Mae brought in new directors and new executives. More change may be coming. The Ofheo report suggested that two directors, Chairman Stephen Ashley and Ann Korologos, should leave the board because they have served more than 10 years, the regulator's limit. Fannie Mae on May 19 said Thomas Gerrity, a director since 1991, would leave by year-end.
This trio and others from the Raines era deserve to be fired for negligence. Gerrity already as been replaced as head of the audit committee by Dennis Beresford, former chairman of the Financial Accounting Standards Board.
There may be one big change to come. Fannie Mae might never shed its past led by Mudd, a six-year company veteran who was criticized in the Ofheo report. Fannie Mae has yet to restate its earnings for past periods that were affected by the accounting flim-flam and may have to report more errors. The company or the government may seek reimbursement of inflated executive pay.
Only a CEO with no past ties to the company would be able to deal with those matters credibly.
(David Pauly is a columnist for Bloomberg News. Opinions expressed are his.)