A report by the Office of Federal Housing Enterprise Oversight (OFHEO) released on Tuesday charged senior management of the mortgage giant Fannie Mae with manipulating accounting to hit earnings targets in order to maximize their bonuses and other executive compensation, the New York Times reports. The accounting manipulation tied to bonuses occurred from 1998 to 2004, OFHEO says, a longer period than earlier reported.
OFHEO and the Securities and Exchange Commission (SEC) also announced on Tuesday that Fannie Mae had agreed to a settlement with the SEC and would pay a penalty of $400 million. The company did not admit any wrongdoing, according to Reuters.
As part of the settlement, Fannie agreed to cut its holdings and make “top to bottom" changes in its corporate culture, the Times says. Fannie also agreed to limit the growth of its portfolio mortgage assets to December 31, 2005, levels, MSNBC reports.
During the six-year period from 1998 to 2004, Fannie Mae reported smooth profit growth and managed to hit its earning targets each quarter, basking in the image of a first rate institution. But the image was a “façade”, according to a statement by James B. Lockhart, the acting director of OFHEO. “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.”
A September 2004 OFHEO report had said that that Fannie Mae had put off accounting for $200 million of $439 million in expenses in 1998 to future periods so that executives could collect $27 million in bonuses. Tuesday’s report said that Franklin Raines, former chairman and chief executive officer, earned $90 million from 1998 to 2004, of which $52 million was tied to meeting earnings targets. Raines and former chief financial officer Timothy Howard resigned in December 2004.
The OHHEO review, which had taken three years, involved nearly 8 million pages of documents, the Associated Press reports.
The report also charged Fannie’s board of directors with failing to exercise proper oversight.
In February, the board released its own report based on an investigation led by former Senator Warren Rudman. Their report concluded that accounting practices at Fannie Mae were not consistent with generally accepted accounting principles, but blamed Timothy Howard and the former controller, Leanne Spencer, the Times says.
Thomas Gerrity, a long time director and head of the board’s audit committee, resigned last Friday and will be succeeded by Dennis R. Beresford, a former chairman of the Financial Accounting Standards Board.
The Justice Department is conducting a separate investigation of Fannie.