September 24, 2004
Overseer Says Fannie Mae May Be Due for Shake-Up
By JENNIFER 8. LEE
SourceASHINGTON, Sept. 23 - After harshly criticizing Fannie Mae for improper accounting practices in a 211-page report, federal regulators said on Thursday that they had raised the possibility of a management shake-up at the mortgage giant to clean up its culture and finances.
Arguing that the problems discovered thus far were grave enough that "immediate action is warranted," the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac, submitted a list of corrective steps to the board of Fannie Mae on Monday.
A letter sent by Armando Falcon Jr., the head of the housing oversight agency, said board members "must consider the accountability of management and whether we have sufficient confidence in management to fully implement these corrective measures and bring about broad cultural and operational changes in the area of concern. The analysis and findings of this report make it difficult to assert that confidence."
The criticism of Fannie Mae's management appeared to be a sharp rebuke to its chief executive, Franklin D. Raines, even though he was seldom mentioned in the regulators' report. Mr. Raines, who directed the Office of Management and the Budget for two years during the Clinton administration, has been mentioned as a candidate for Treasury secretary if Senator John Kerry is elected president.
The 55-year-old Mr. Raines, who became head of Fannie Mae in 1999, maintains a high profile in both political and business circles and is cited as one of the most powerful black business executives in the country. He has often been portrayed as model of corporate governance.
Fannie Mae appeared to be preparing for a possible high-level shake-up by amending the employment contracts of its three top officers.
According to a filing with the Securities and Exchange Commission on Thursday, the company, at the request of the housing oversight agency, reached agreements with the three officers in the last seven days to deny them huge payouts in the event they are terminated for cause.
The move follows a federal judge's ruling earlier this month that said that Freddie Mac's former chief executive, Leland C. Brendsel, could recover more than $50 million in compensation after he retired amid an accounting scandal.
The regulators' proposals for Fannie Mae, which have not been made public, address accounting policies and practices, capital adequacy, internal controls and segregation of duties, among other topics.
"I am prepared to work with you to resolve this matter in an orderly manner. However, you must realize I am prepared to act if the board does not," Mr. Falcon wrote in his letter.
Although the Securities and Exchange Commission remains the ultimate judge in the accounting irregularities raised by the oversight agency, the smaller agency still can apply political pressure on the two government-chartered but publicly traded mortgage companies, which have been criticized for using their close relationship with the federal government to profit and wriggle away from harsher regulation.
Freddie Mac and Fannie Mae, created by Congress to boost home ownership, have a line of credit with the Treasury, an implicit government backing that helps the firms to borrow more cheaply than other lenders.
In recent years, regulation of the mortgage companies has emerged as a somewhat partisan issue, with a number of prominent Republicans, including Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan, saying that their important financial role and rapid growth should generate tighter financial scrutiny.
As the companies have developed an adversarial relationship with the Bush administration and other Republicans, the political donations from employees of the two companies have begun to favor Democrats, according to the Center for Responsive Politics, a nonpartisan group that tracks campaign donations.
Congressional Democrats have resisted the tightest efforts to regulate the two companies, arguing in part that restrictions may interfere with the companies' role in promoting access to low-income housing.
James Johnson, Fannie Mae's former chief executive, was Senator Kerry's chief adviser during his search for a vice presidential pick.
The report by the regulators will no doubt provide ammunition to Republican critics in Congress, though it is doubtful that any attempt to rein in Fannie Mae's scope and power will be attempted until after the November election.
The accounting techniques used by Fannie Mae effectively resulted in off-balance sheet reserves that were used to smooth earnings to meet the expectations of financial analysts, according to the report.
The regulators said it was unclear what effect the disclosures of Fannie Mae's accounting irregularities would ultimately have on the company's bottom line.
The problems revealed by the report on Wednesday were confined to the first two areas that the investigators had looked at - amortization and derivatives, which are used to cushion the company's portfolio against swings in interest rates and other market conditions.
But outside analysts said that the S.E.C. did not always agree with the oversight office's assessments.
Earlier this year, the S.E.C. disagreed with the smaller agency on how Fannie Mae and Freddie Mac should treat losses on manufactured homes.
The oversight office "is the lower court and the higher court, the court of appeals, is the S.E.C.," said Jonathan Gray, an analyst for Sanford C. Bernstein.
Copyright 2004 The New York Times Company