Internal Review of Fannie Mae Cites “Attitude of Arrogance”

In a 1996 internal memo to Timothy Howard, Chief Financial Officer of Fannie Mae, Leanne Spencer, Vice President of Financial Reporting wrote, “What do I have up my sleeve to solve an earnings shortfall?” She adds in the same document, according to, “I recognize (and thought about it yesterday) that we might want to show the board $2.48. I made the decision that I wanted to show you the real answer and the let you decide if you wanted me to make any adjustment. Will be easy to do on Monday morning.” Fannie Mae reported earnings of $2.48 in 1996.


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The memo is quoted in a 2,600 page report, issued on Friday by Fannie Mae’s Board of Directors, on the results of an 18-month internal investigation led by former Senator Warren Rudman, now an attorney at Paul, Weiss, Rifkind Wharton & Garrison. The company’s directors initiated the probe after accounting violations at the mortgage company were disclosed by the company’s chief regulator, the Office of Federal Housing Enterprise Oversight (OFHEO) in September 2004.

The report concludes that financial executives at Fannie Mae developed a culture that fostered misleading results and employed a unqualified staff consisting of employees who occupied critical accounting functions who “were either unqualified for their positions, did not understand their roles, or failed to carry out their roles properly.”

The Rudman report said that Howard, who left Fannie Mae in December 2004, and Spencer, who was promoted to Controller, and who left in August 2005, “were primarily responsible” for the flawed accounting at Fannie Mae.

Fannie Mae’s management “tightly controlled the information flow to the board generally, and in particular, filtered the accounting and financial information the board received,” the Rudman report says, according to Bloomberg.

In a statement accompanying the release of the report, Stephen B. Ashley Chairman of the Fannie Mae Board of Directors says, "[A]lthough management paid lip service to a culture of openness, intellectual honesty, and transparency, the actual corporate culture suffered from an attitude of arrogance (both internally and externally) and an absence of cross-enterprise teamwork (with a "siloing" of information), and discouraged dissenting views, criticism, and bad news."

The report confirmed findings by OFHEO in September 2004, 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, the Associated Press reports. Documents quoted in the Rudman report show management focused on meeting earnings targets that would trigger the bonuses. This was the only instance, however, where flawed accounting was tied to executive bonuses.

The report did not find that Franklin Raines, Chairman and Chief Executive Officer, knew that Fannie Mae’s accounting practices violated the rules. “We did find, however, that Raines contributed to a culture that improperly stressed stable earnings growth and that . . . he was ultimately responsible for the failures that occurred on his watch.”

Howard did not tell the board that the entire $439 million expense should have been recorded in 1999, the report says, and Spencer did not tell a committee of the board that their auditor noted an “audit difference” related to the deferral of expense reporting in 1999, Bloomberg says. She also misled the board by telling them that additional tax credits were due to improved systems and not to policies that were in violation of generally accepting accounting principles.

Top former executives at Fannie Mae remain under investigation by the Securities and Exchange Commission and the Justice Department and Congress is considering legislation to set up more aggressive oversight of Fannie Mae and Freddie Mac, according to the New York Times.

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