Employees at mortgage giant Fannie Mae manipulated accounting so that executives could collect millions in bonuses as senior management deceived investors and stonewalled regulators at a company whose prestigious image was phony, a federal agency charged Tuesday.
The blistering report by the Office of Federal Housing Enterprise Oversight, the product of an extensive three-year investigation, was issued as the government-sponsored company struggles to emerge from an $11 billion accounting scandal.
Earlier, a person familiar with the situation said that Fannie Mae was being fined between $300 million and $500 million for the alleged manipulation of accounting to facilitate executives' bonuses, in a settlement with the housing oversight agency.
''The image of Fannie Mae as one of the lowest-risk and 'best in class' institutions was a facade,'' James B. Lockhart, the acting director of OFHEO, said in a statement as the report was released. ''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.''
The report also faulted Fannie Mae's board of directors for failing to exercise its oversight responsibilities and failing to discover ''a wide variety of unsafe and unsound practices'' at the largest buyer and guarantor of home mortgages in the country.
The OFHEO review, involving nearly 8 million pages of documents, details what the agency calls an arrogant and unethical corporate culture. From 1998 to mid-2004, the smooth growth in profits and precisely-hit earnings targets each quarter reported by Fannie Mae were ''illusions'' deliberately created by senior management using faulty accounting, the report says.
The accounting manipulation tied to executives' bonuses occurred from 1998 to 2004, according to the report, a much longer period than was previously known.
Regulators had earlier said that Fannie Mae in 1998 improperly put off accounting for $200 million in expenses to future periods so executives could collect $27 million in bonuses.
''By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders,'' the report says. The manipulation ''made a significant contribution'' to the compensation of former chairman and chief executive Franklin Raines, which totaled more than $90 million from 1998 to 2003, it says, including some $52 million directly tied to the company hitting earnings targets.
Fannie Mae employees falsified signatures on accounting transactions that helped the company meet the 1998 earnings targets, according to congressional testimony by the former director of OFHEO. The agency first discovered in 2004 the accounting-rule violations and alleged earnings manipulation by Fannie Mae to meet Wall Street targets -- disclosures that stunned the financial markets.
In December 2004, the SEC ordered Fannie Mae to restate its earnings back to 2001 -- a correction expected to reach an estimated $11 billion. The Justice Department has been pursuing a criminal investigation.
Raines and former chief financial officer Timothy Howard were swept out of office by Fannie Mae's board in December 2004.
OFHEO levied a record $125 million fine in 2003 against Freddie Mac, Fannie Mae's smaller rival in the multitrillion-dollar home mortgage market, for misstating earnings -- mostly underreporting them -- by $5 billion for 2000-2002.
On Friday, Fannie Mae said it was replacing the chairman of its board's audit committee, a key position as the second-largest U.S. financial institution reworks its accounting and struggles to emerge from the scandal. The company said the board had named accounting professor Dennis Beresford to replace audit committee chairman Thomas Gerrity.
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