WASHINGTON -- The chief executive of mortgage giant Fannie Mae, who was the top operations official at the time of accounting misdeeds, endured pointed questioning yesterday from senators demanding details of his actions.
With Fannie Mae enmeshed in an $11 billion accounting scandal and government pressure on it mounting, president and chief executive Daniel Mudd and chairman Stephen Ashley were keenly on the defensive at a hearing by the Senate Banking Committee.
``I really do find it astounding that neither of you knew what was going on," Senator Chuck Hagel, a Nebraska Republican, and longtime critic of government-sponsored Fannie Mae, told the executives during a lengthy and bitter exchange.
``I'm astounded that you would stay with this institution," Hagel said to Mudd. And he suggested that Mudd should seriously consider giving away to charity the bonus money he received as Fannie Mae's chief operating officer from 2000 through 2004.
Mudd was elevated to chief executive and president in December 2004 when the board swept chief executive Franklin Raines and chief financial officer Timothy Howard from office.
Current and former executives of the company reaped hundreds of millions of dollars in bonuses in a deceptive accounting scheme over six years, federal regulators have alleged. Fannie Mae employees are said to have manipulated accounting to hit quarterly earnings targets so senior executives could pocket the bonus money from 1998 to 2004.
``Never at any point would I sanction any departure from the [accounting] rules in order to hit those targets," Mudd testified, saying he was unaware of any misconduct, fraud, or cheating at the firm during the period in question. ``I was shocked and stunned" when the situation came to light in September 2004, he said.
Mudd became aware as early as the fall of 2003 of an employee's serious allegations of accounting misconduct and failed to convey the information to Fannie Mae's board, according to a report by examiners at the Office of Federal Housing Enterprise Oversight. The report did not draw a conclusion regarding his knowledge of or participation in the alleged accounting manipulations.
Washington-based Fannie Mae, the second-largest US financial institution after Citigroup Inc. and the second-biggest borrower after the US government, finances one of every five home loans in the country. Its long-prevailing image of prestige and excellence was a sham, oversight office regulators said in the scathing report issued last month, which described what they called an arrogant and unethical corporate culture.
In a settlement disclosed May 23, the oversight office and the Securities and Exchange Commission fined Fannie Mae $400 million -- one of the largest civil penalties ever in an accounting fraud case. The company also agreed to temporarily cap its mortgage holdings at $727 billion.
It will take years for Fannie Mae to completely reform and recover from the scandal, the acting director of the oversight office testified at yesterday's hearing.
Said James B. Lockhart, whose agency also oversees Freddie Mac, the smaller government-sponsored sibling of Fannie Mae: ``These companies were so poorly run that it's going to take many years to fix."