Fannie Mae to pay 400 million dollar fine in accounting scandl
WASHINGTON – US mortgage finance giant Fannie Mae agreed to pay a 400-million-dollar fine for massive accounting violations after an audit highlighted “an arrogant and unethical corporate culture,” officials said.
The settlement was announced jointly by the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight after a OFHEO report detailed improper accounting and earnings manipulation designed to trigger bonuses for senior executives from 1998 to 2004.
“The penalty and settlements represent a major step in correcting a dangerous course that had been followed by one of the largest financial institutions in the world,” said acting OFHEO director James Lockhart, whose office oversees government-sponsored enterprises including Fannie Mae.
“Unprincipled corporate behavior and inadequate controls will simply not be tolerated.”
The audit found the government-sponsored mortgage firm had poor internal controls, and as a result overstated reported income and capital by an estimated 10.6 billion dollars from 1998 to 2004.
The report adds weight to calls for reform of the mortgage giant, the world’s second largest borrower after the US government.
US Treasury Under Secretary Randal Quarles said the report “substantially amplifies previous findings of misconduct and mismanagement at Fannie Mae over many years.”
Quarles said the report should prompt Congress to put more teeth into oversight of Fannie Mae and other government-sponsored mortgage institutions.
“Fannie Mae’s faults were not limited to violating accounting and corporate governance standards, but included excessive risk-taking and poor risk management as well,” he said.
“Its leadership manipulated earnings to reach compensation targets and to mislead investors as to the real condition of the company. The report reveals that Fannie Mae’s carefully crafted image of being low-risk and well-managed was an illusion.”
In a separate statement, Fannie Mae said its new leadership put in place after the accounting problems first came to light were pleased to resolve the matter.
“We are pleased that we have been able to reach a comprehensive agreement and bring these matters to a conclusion,” said Stephen Ashley, chairman of the board.
“This important step today builds on some of the changes and progress we have made over the past 18 months to rebuild the company and restore the confidence of our shareholders and stakeholders.”
A government-chartered corporation, Congress created Fannie Mae to add more liquidity to the housing market and to help low and middle income families buy homes.
Fannie Mae along with other government-sponsored mortgage entities guarantees or owns trillions of dollars of loans.
But the special relationship between the government and the company has led some in Congress to criticize the company for being too big and risky to taxpayers.
The report highlighted poor governance by Fannie Mae in contrast to its image as a safe, conservative company.
“The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,” said Lockhart.
“Our examination found an environment where the ends justified the means. Senior management manipulated accounting; reaped maximum, undeserved bonuses; and prevented the rest of the world from knowing. They co-opted their internal auditors.”
Ex-chief executive Franklin Raines and ex-finance director Timothy Howard were both sacked in 2004 in the wake of the scandal.