Franklin D. Raines, the chairman and chief executive of Fannie Mae, broke a two-week silence to testify before a House subcommittee Wednesday. One questioner found his company's conduct "unseemly;" another called the investigation a "witch hunt."
Posted on 10/07/2004 6:24:59 AM PDT by OESY
WASHINGTON Franklin D. Raines, the head of Fannie Mae, took issue with every major damaging conclusion of the company's regulator on Wednesday in an embattled appearance before a subcommittee of the House of Representatives.
Breaking his silence two weeks after a report by the company's main regulator plunged the management of the mortgage giant into crisis by accusing senior executives of manipulating accounting and earnings to get bigger bonuses, Mr. Raines said the federal agency had drawn unfair conclusions. He said the agency denied the company a fair hearing and inexplicably waged an unusually public campaign against it.
"I want to make one thing very clear,'' Mr. Raines said, departing from his prepared text. "I've tried my best to make sure we've done the right thing in the right way." If he is proved wrong, "our board and our shareholders will hold me accountable," he said. "I will hold myself accountable.
"We've learned no facts to support the allegation in the report that the accounting was undertaken to achieve bonuses," Mr. Raines said, challenging the most important accusation made by the company's chief regulator, the Office of Federal Housing Enterprise Oversight, known as Ofheo. The regulators, he said, had known about one of the central accounting issues "for six years and did not comment about it."
Mr. Raines's appearance before the House Subcommittee on Capital Markets stood in sharp contrast to those of top executives at other besieged companies accused of corruption who, over the last few years, have come to Congress to either plead the Fifth Amendment or claim no involvement or knowledge of the issues under investigation. Mr. Raines instead offered a different message - that he knew and approved of many accounting techniques at issue, that the company did nothing wrong and that the regulator over-reached.
He did not dispute the characterization of some of the company's supporters, a group of Democratic lawmakers who either asserted or implied that the report had been motivated by a broader political assault on Fannie Mae inspired by market rivals and some members of Congress who want to rein in the company.
For four hours before his appearance, the subcommittee heard extensive details about the case from Armando Falcon Jr., the director of the oversight office.
He repeated the office's accusation that top management had deliberately violated accounting rules and engaged in "cookie jar'' accounting, dipping into reserves or postponing the recognition of expenses to smooth out quarterly earnings, meet financial projections and earn larger bonuses.
Mr. Falcon described a corporate culture that fostered the accounting irregularities and said he doubted that the problems could be fixed without a shake-up of senior management. He said Fannie Mae had refused to comply with requests for documents, forcing the regulators to obtain subpoenas with the assistance of the Justice Department.
(Mr. Raines later denied that accusation as well).
Mr. Falcon also took issue with the company's presentation that the accounting issues reflected judgments over ambiguous standards, saying that these were "black-and-white issues.''
"These are not issues that reasonable people will disagree on,'' he said. "They willfully did not apply accounting rules properly. They understood the rules. They chose not to apply them."
He also said that his agency had begun to look more closely at the role played by KPMG, Fannie Mae's outside auditors, and that he had referred the matter to the Public Company Accounting Oversight Board, the new federal agency that oversees the accounting profession.
Some lawmakers applauded Mr. Falcon's efforts, especially in the face of much hostile questioning.
"You have exposed illegal activities on the part of Fannie Mae, and you are being criticized for exposing it,'' said Representative Christopher Shays, Republican of Connecticut. "I want to congratulate you. You have courage. The messenger is being shot for delivering the message.''
Representative Richard H. Baker, Republican of Louisiana, the subcommittee's chairman and a longtime critic of Fannie Mae, said that the "content of this report cannot be legitimately questioned."
But others, Democratic and Republican, attacked Mr. Falcon, illustrating that although the crisis had cost Fannie Mae much political capital, the company still had many friends in Congress.
Representative William Lacy Clay, Democrat of Missouri, accused the regulators of "rushing to judgment."
"This hearing is about the political lynching of Franklin Raines,'' Mr. Clay said. "We have seen this kind of action before. This is truly a witch hunt."
Representative Artur Davis, Democrat of Alabama, asked Mr. Falcon, "Is it possible that by weakening this institution, you are weakening the housing market because of the broad insinuations you have made?"
In both instances, Mr. Falcon forcefully defended the integrity of the report.
Mr. Raines, who generally was both assertive and patient with his critics, lost his composure only once, when he was asked about the potential impact of the report on his chances of serving in a future Democratic administration.
"I've got to tell you, the thing that bothers me far more than the Treasury thing - far more - is explaining to my kids," he said, pausing to collect his thoughts. "That's hard. It's hard when your daughter feels she needs to say to her dad, 'I support you.' I'm supposed to be supporting her."
He also reacted visibly when Mr. Baker made public a document showing that Mr. Raines had received $17.7 million in compensation for 2002, and that 19 other executives received payments that year of more than $1 million. Mr. Baker said that over the last five years, the company had awarded $245 million in bonuses, a figure that stunned even the company's strongest supporters and seemed to deflate the image long put forward by Mr. Raines that the company's sole mission was to provide financing for low- and moderate-income housing.
Barney Frank, a Massachusetts Democrat who has long supported the company, defended it again today, saying the company's regulators had over-reached in concluding that the company's decisions had affected its "safety and soundness." Nonetheless, he called the bonuses "entirely inappropriate" and "unseemly."
"You gentlemen work hard and you do good work, but I don't know why you need these bonuses," Mr. Frank said.
Mr. Raines said that most large public companies tie compensation to stock performance. And he and the company's chief financial officer, J. Timothy Howard, who also testified, denied that they had set accounting standards in order to get larger bonuses.
Mr. Raines's testimony made clear that his strategy for survival will hinge on the results of the investigation by the Securities and Exchange Commission, the final arbiter of the accounting dispute, which he hopes will conclude that the company did not misapply two significant accounting principles, and in any case will not force the company to undertake a major earnings restatement.
Franklin D. Raines, the chairman and chief executive of Fannie Mae, broke a two-week silence to testify before a House subcommittee Wednesday. One questioner found his company's conduct "unseemly;" another called the investigation a "witch hunt."
Enron was a democrat problem as well.
To see just how CORRUPT Fannie Mae is, one needs only to look at the over-valued inflated pricing Fannie Mae ignored and incouraged with its dealing with General Developement in many of the Florida cities,,,like Port Charlotte...etc
If Fannie Mae blows up, look out below. FNMA debt instruments are the backbone of most major mutual funds and pension funds - let the slightest hint get out that the government isn't going to stand behind those trillions of dollars in derivative mortgage-backed securities (it isn't legally obligated to, but Wall Street just assumes it will) and all hell will break loose.
Rep. Baker said yesterday that over 3,000 U.S. banks hold Fannie Mae and/or Freddie Mac securities as 100% of their core capital. Most other banks hold around 50% of their capital in these securities. The entire U.S. banking system depends on maintaing the value of these securities. And these guys at Fannie screwed around with thier basic reporting of earnings and expenses, putting the entire U.S. banking system at risk, so they could get millions in bonuses.
I would have expected Jamie Gorelick's name to be on that list.
Bwahaahahahaha no she didnt.........YOU DID! you putz...
Government has no business in business......
everything they touch turns to caca
imo
Excellent point. How quickly we forget Ken Lay was Clinton's golfing buddy, received $1.8 billion in loan guarantees for power plants in India and Croatia under Clinton, pushed global warming (to trade pollution credits) which Democrats embraced, employed Bush-critic Paul Krugman as an adviser, and used Bob Rubin as chief lobbyist with the incoming Bush administration to go easy on Enron.
Finally, the corruption took place on Clinton's watch; the clean-up on Bush's watch.
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