Wednesday, May 24, 2006

Fannie Mae to pay $400 million fine

Fannie Mae to pay $400 million fine
By Elliot Blair Smith, USA TODAY

Housing-finance giant Fannie Mae (FNM) agreed Tuesday to pay federal regulators a $400 million fine for alleged accounting manipulations and governance lapses by its board and management that are expected to force it to erase $10.6 billion in previously reported profits.

But the accord with its chief regulator, the Office of Federal Housing Enterprise Oversight, after a three-year investigation, stops short of bringing a final accounting to a scandal that has badly tarnished the government-sponsored lender while embroiling Congress and the administration in a debate over its future.

The Securities and Exchange Commission reached a related settlement under which Fannie Mae neither admitted nor denied allegations of financial fraud.

But the SEC and Justice Department are continuing their investigations of the company and its executives, who control a $721.5 billion portfolio of mortgage loans and securities through its congressional mandate to expand homeownership in the USA.

Throughout OFHEO's 340-page investigative report, former Fannie Mae CEO Franklin Raines and former CFO Timothy Howard are held as principally responsible for manipulating the company's earnings from 1998 to 2004 while reaping tens of millions of dollars in pay and bonuses.

OFHEO Acting Director James Lockhart said regulators may try to force the executives to make restitution and will consider removing tainted managers who remain on the job. "We will look at all the managers mentioned in the report and see if some sort of action should be taken. It could be removal, it could be disgorgement," Lockhart told reporters in Washington.

For the first time, the OFHEO report links Fannie Mae's current CEO, Daniel Mudd, to some of the organization's questionable practices. For instance, the report says Mudd oversaw flawed internal investigations of company abuses reported by employees.

In a conference call with Wall Street analysts, current Chairman Stephen Ashley said the board and its legal counsel had reviewed OFHEO's report but "found no misconduct" by Mudd, and he has the board's full support.

Former OFHEO director Armando Falcon, whom the board consulted when it replaced Raines, said he no longer backs Mudd. "If I knew then what I know now from reading this report, I would have advised the board to find someone outside the company," he said.

Senate Banking Committee Chairman Richard Shelby, R-Ala., who favors tougher regulation of Fannie Mae, said: "They've got a big hill to climb. I wish them well. But they have deep problems."

Contributing: Paul Davidson

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