Fannie Mae may have manipulated earnings
Evidence suggests aim was to allow bigger bonuses
WASHINGTON -- Federal regulators have found evidence suggesting that mortgage giant Fannie Mae manipulated earnings to facilitate bigger bonuses to executives, according to a lawmaker familiar with the findings.
In an eight-month investigation, the agency that supervises Fannie Mae found a pattern of manipulation aimed at smoothing out volatility in profits from quarter to quarter similar to that which occurred at rival Freddie Mac -- whose understatement of billions in profits prompted a management shake-up and a $125 million government fine. The agency, the Office of Federal Housing Enterprise Oversight, was presenting its new report criticizing Fannie Mae's accounting practices to the board of the government-sponsored company yesterday.
Representative Richard Baker, a Republican from Louisiana, has been briefed on the report, which provides ''a strong indication that Fannie Mae manipulated earnings in a way that appears to be smoothing," said Baker spokesman Michael DiResto.
DiResto was confirming a report in yesterday's Wall Street Journal.
He said that Baker, who heads a House panel that oversees the two mortgage companies, had a ''strong concern" that increasing executive bonuses may have been a factor behind the faulty accounting -- which he said the report presented as ''a strong possibility."
OFHEO spokeswoman Corinne Russell declined to comment, as did Janice Daue, a spokeswoman for Fannie Mae.
Fannie Mae's chairman and chief executive, Franklin Raines, has defended the company's accounting and said that it has unfairly suffered ''collateral damage" from the accounting crisis at Freddie Mac.
Washington-based Fannie Mae is the second-largest US financial institution, behind Citigroup.
Its accounting came under close scrutiny after Freddie Mac, its smaller rival in the multitrillion-dollar home mortgage market, disclosed in June 2003 that it had understated profits by some $4.5 billion for 2000-2002 in an effort to smooth earnings and maintain its image on Wall Street as a steady performer. The accounting crisis brought the ouster of several top Freddie Mac executives, investigations by the Justice Department and the Securities and Exchange Commission, and a record $125 million fine in a settlement with OFHEO.
While the regulators have found a similar ''smoothing" pattern of earnings manipulation at Fannie Mae, there apparently is no evidence of built-up profits that haven't been disclosed such as occurred at Freddie Mac, according to the report.
