Corruption and greed everywhere...

A Fannie Mae Settlement Is Reported
Published: May 23, 2006

Fannie Mae, the giant mortgage buyer, is expected to pay more than $400 million today as part of a settlement to resolve claims that executives manipulated earnings in the 1990's so they could receive bigger bonuses, two people briefed on the situation said yesterday.

A government official confirmed Fannie Mae's settlement with the Office of Federal Housing and Enterprise Oversight, the company's chief safety and soundness regulator and the Securities and Exchange Commission, which oversees its books. Neither person would agree to be identified because the settlement had not been formally announced.

Officials from Fannie Mae, Ofheo and the S.E.C. declined to comment last night. An announcement of the settlement is expected at a news conference this afternoon.

The settlement comes as Ofheo publicly releases a comprehensive and potentially damaging report that is expected to level scathing criticism at Fannie Mae's accounting practices and management culture.

For Fannie Mae, the settlement is also a significant step in moving beyond an accounting scandal of almost $11 billion that resulted in a major management shake-up, including the abrupt departure of its chief financial officer and Franklin D. Raines, its former chairman and chief executive, who left in December 2004.

The company is trying to get its financial house in order so that it can issue revised earnings reports and maintain its listing on the New York Stock Exchange.

Daniel H. Mudd, the company's new chief executive but a former top manager during Mr. Raines' tenure, has tried to overhaul the company's once arrogant culture and invest hundreds of millions of dollars to improve its accounting controls.

In another sign of change, Fannie Mae announced last Friday that Thomas Gerrity, a longtime director and head of the board's audit committee, would step down by the end of the year.

He will be succeeded by Dennis R. Beresford, a former chairman of the Financial Accounting Standards Board.

Ofheo's findings could also provide an impetus for legislation to sharply limit Fannie Mae's mortgage portfolio holdings and create a tougher regulator for the company, as well as measures concerning government-sponsored enterprises, steps that the Bush administration strongly supports.

The House passed a less restrictive bill last year while the Senate Banking Committee approved a more aggressive measure on a strictly party line vote last July. But with time running out in the Congressional session this year, many Capitol Hill observers say the prospects for passing legislation are dimming.

In February, Fannie's board released a 616-page independent report, by a team of investigators led by former Senator Warren B. Rudman, concluding that the company's accounting practices in virtually all of the areas reviewed were not consistent with generally accepted accounting principles.

But Ofheo's report is expected to be much more critical and is expected to recommend that restrictions be placed on Fannie Mae's mortgage holdings.

Fannie Mae's more than $700 billion in mortgage holdings help to generate about two-thirds of its profit.

The Justice Department has been conducting a separate investigation. In addition, Fannie Mae faces shareholder lawsuits.

At $400 million, Fannie Mae's settlement would be more than three times the $125 million that Freddie Mac, its smaller rival, paid regulators in 2003 after it was found to have understated earnings by about $5 billion from 2000 to 2002 to minimize large profit swings.

News of the settlement was first announced late yesterday on the Web site of The Wall Street Journal.

The report and regulatory settlement are another humbling moment for Fannie Mae, the political and financial giant that was created by Congress during the Depression to make home ownership more affordable.

The company provides hundreds of billions of dollars to the home finance market by buying mortgages from banks and savings associations. It keeps some mortgages in its portfolio. Others are repackaged and sold as mortgage-backed securities.

In September 2004, Ofheo said in a preliminary report that Fannie used improper "cookie jar" reserves and deferred expenses to smooth earnings and meet profit targets.

That move and other, smaller accounting steps let it meet earnings goals, enabling executives — including Mr. Raines, then the chief executive-designate, and James A. Johnson, the chief executive — to receive the maximum amount in bonuses for that year.

In the February report commissioned by Fannie Mae's board, investigators cataloged how the company repeatedly violated accounting principles to show stable earnings and less volatility. But that report laid the responsibility for many of the violations on two former top executives — the chief financial officer, J. Timothy Howard, and the controller, Leanne Spencer.

It found that Mr. Raines, who had served as a top official in the Clinton administration, "contributed to a culture that improperly stressed stable earnings growth."

The report also concluded that employees who held vital accounting and financial reporting jobs were "either unqualified for their positions, did not understand their roles, or failed to carry out their roles properly."

And it found that management repeatedly presented directors with information that "generally was incomplete and, at times, misleading."

But Ofheo's report could find deeper deficiencies. And based on the findings of its 27-month investigation, Ofheo could call for the company's former executives to return part of their pay package.