Fannie Execs Defied Standard Accounting Principles in Order to Hit Bonus Bonanza

(Washington, D.C.)  Leslie K. Paige, Director of Special Projects for the Council for Citizens Against Government Waste (CCAGW) today issued this statement in reaction to today’s’ lengthy testimony by Armando Falcon, Jr., Director of the Office of Federal Housing Enterprise Oversight (OFHEO) and Fannie Mae executives Franklin Raines and Timothy Howard before the House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises.

            “At today’s hearing, instead of blasting Fannie Mae for its accounting shenanigans, many members of Congress abdicated their fiscal responsibility to taxpayers and embarrassed themselves with transparent and lame attempts to soft-pedal and excuse the company’s financial practices.  Many of these same members of Congress were appropriately apoplectic about the malfeasance of Enron corporate executives.  Today, they showed no such outrage about Fannie Mae, whose finances carry much more of a risk to the entire economy.  Several representatives attacked the regulator, accusing OFHEO of leaking the results of its preliminary report illegally and prematurely.  When Chairman Baker displayed a chart containing important information quantifying Fannie Mae’s executive salaries and bonuses, Fannie apologists practically turned the hearing into a circus trying to squelch the public release of the information.  It was a shameful performance on the part of ostensible seriously public servants.

            “But other representatives who care more about protecting taxpayers than catering to Fannie Mae will take action based on the testimony by OFHEO Director Armando Falcon Jr. and former Fannie Mae financial manager Roger Barnes.  Falcon and Barnes agreed that Fannie Mae not only operates without meaningful regulatory oversight from Congress; the company apparently invented and implemented its own special brand of accounting rules whenever the generally acceptable accounting practices that all other financial institutions adhere to didn’t get them the results they wanted.  OFHEO’s testimony reveals that Fannie Mae’s corporate culture was focused like a laser on massaging its accounting systems in order to project a stable image to its investors and analysts on Wall Street, and to reach specific earnings benchmarks which, in turn, triggered compensation bonuses for Fannie executives.  The issues raised by OFHEO are not, as some have suggested, the result of a one-time conflict in the interpretation of arcane accounting rules.  Questionable accounting practices were frequent and the corporate culture was weak.  Fannie Mae executives clearly understood the accounting rules and willfully chose to circumvent them.  The compensation bonuses, in some cases, exceeded the annual salaries of the executives.

            “Unfortunately, the OFHEO report is the tip of the iceberg.  There is a lot more to come.  For example, while Franklin Raines claims to fully respect and welcome OFHEO in its role of regulating the GSEs, why did Fannie executives force OFHEO to obtain subpoenas in order to do its job, interview employees, and obtain documents?  What role, if any, did Fannie Mae’s auditor, KPMG, have in the manipulation of earnings?  Is Fannie Mae the next corporate rogue entity?

            “The accounting scandal at Fannie Mae should lead to real changes in its financial practices.  But with the exception of Chairman Richard Baker (R-La.), Christopher Shays (R-Conn.), Doug Ose (R-Calif.), Ed Royce (R-Calif.) and a handful of other House members, Fannie Mae has been routinely shielded by Congress and has escaped any sort of sensible scrutiny.  Congress owes the taxpayers much more.  Let’s hope members remember who they work for and pass GSE reform legislation.”

            The Council for Citizens Against Government Waste is the lobbying arm of Citizens Against Government Waste, the nation's largest nonpartisan, nonprofit organization dedicated to eliminating waste, fraud, abuse, and mismanagement in government.