Blasting Fannie Mae
[Interrupting a two-part post in light of breaking news.]
In the type of language normally reserved when giving the guilty the severest possible sentence, OFHEO has released a scalding 304-page report excoriating Fannie Mae up one side and down the other:
The report details an arrogant and unethical corporate culture where Fannie Mae employees manipulated accounting and earnings to trigger bonuses for senior executives from 1998 to 2004.
Fannie Mae (some of AHI’s previous coverage here) now looms as the biggest financial scandal since Enron — and with taxpayers’ dollars.
F comes right after E …
Although the losses are less than Enron (so far), the abuse of public trust (not just shareholders but taxpayers) and systemic risk are much greater, not to be relieved by costless contrition and toothless bromides, points not yet made in the Washington Post or the New York Times reporting today. Perhaps their tone will toughen when they have read the report cover to cover, as I will this weekend.
When the scandal’s full history is written, OFHEO’s report may well prove the turning point, for its language is uncompromising and unrelenting:
“The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,” said [OFHEO Acting Director James B.] Lockhart. “Our examination found an environment where the ends justified the means. Senior management manipulated accounting; reaped maximum, undeserved bonuses; and prevented the rest of the world from knowing. They co-opted their internal auditors. They stonewalled OFHEO.”
Can’t you see we’re disclosing everything we can?
Over and over, the language is extraordinary — unprecedented in my thirty-year career. According to OFHEO (Fannie Mae itself neither confirmed nor denied the findings), the organization was configured to deliver maximum bonuses, with earnings being Botoxed to look better:
“Fannie Mae’s executives were precisely managing earnings to the one-hundredth of a penny to maximize their bonuses while neglecting investments in systems internal controls and risk management,” Lockhart said. “The combination of earnings manipulation, mismanagement and unconstrained growth resulted in an estimated $10.6 billion of losses, well over a billion dollars in expenses to fix the problems, and ill-gotten bonuses in the hundreds of millions of dollars.”
Earnings just kept rising!
How sound is Fannie Mae? To hear the report, no one really knows:
During the period covered by this report — 1998 to mid-2004 — Fannie Mae reported extremely smooth profit growth and hit announced targets for earnings per share precisely each quarter. Those achievements were illusions deliberately and systematically created by the
Nor does the report shrink for pointing fingers. Whereas the Rudman Report gave the directors a free pass,
Our independent reviewers said everything was fine.
OFHEO’s tone is sharp:
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 … even after the Freddie Mac problems became apparent.
To these charges OFHEO adds another gross impropriety not previously heard:
Fannie Mae senior management sought to interfere with OFHEO’s special examination by directing the Enterprise’s lobbyists to use their ties to Congressional staff to improperly generate a Congressional request for the Inspector General of the Department of Housing and Urban Development (HUD) to investigate OFHEO’s conduct of that examination and to insert into an appropriations bill language that would punish the agency by reducing its appropriations until the Director of OFHEO was replaced.
As I previously observed, Fannie and Freddie for a long time used two individuals from the same lobbying firm:
If you were large governmentally-advantaged institutions, often accused of being a duopoly, each under heavy political fire for massive accounting restatements, risky financial practices, dubious internal procedures, extravagant executive bonuses, and questionable historic payment policies, now trying to demonstrate contrition, would you use two individuals from the same lobbying firm?
In exchange for this public lashing, what does Fannie Mae gain? A $400 million fine in settlement of OFHEO and SEC investigations, but no escape from the company’s woes. Indeed while the $400 million bite calls off two hounds, the OFHEO report is plenty of fresh meat for the baying pack, with language guaranteed to inflame members of Congress:
“[Fannie Mae] is the second largest borrower in the world, only behind the
And angry litigious shareholders:
Earnings management made a significant contribution to the compensation of Fannie Mae Chairman and CEO Franklin Raines, which totaled over $90 million from 1998 through 2003. Of that total, over $52 million was directly tied to achieving earnings-per-share targets.
Focus on Raines, Howard a blur.
Over the Memorial Day weekend, I’ll read the full report, and post about it promptly thereafter. For now, I predict there will now be calls to ‘privatize’ Fannie Mae and Freddie Mac by canceling their Federal charters and severing all their Federal benefits, which cost taxpayers $6-10 billion a year.
If not, there should be.
… after Memorial Day.
