Regulators Question Fannie Mae Earnings
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 on Monday.
Rep. Richard Baker, R-La., has been briefed on the OFHEO 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 Monday'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 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 U.S. 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.
In October, Fannie Mae disclosed a $1.2 billion accounting error for the third quarter, which it said was due to a change in accounting rules and did not affect net income.
The company's profits edged up nearly 1 percent in the second quarter of this year, beating analysts' expectations, to $1.11 billion, or $1.10 a share, from $1.1 billion, or $1.09 a share, a year earlier.
OFHEO told Fannie Mae this spring that its accounting had violated standard principles in some instances and ordered it to adopt a new method to more closely reflect losses on some investments in mobile homes and aircraft leases.
Fannie Mae disputed the regulators' contention, saying that its outside auditor, KPMG, agreed with the company that its accounting does comply with generally accepted accounting principles.
Fannie Mae and Freddie Mac were created by Congress to pump money into the home mortgage market by buying home loans from lenders and packaging them as securities for sale on Wall Street. They have grown explosively in recent years and now stand behind $4 trillion of home mortgages, representing more than three-fourths of the single-family mortgages in the country.
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