Lawmakers demanded that Fannie Mae executives,
including the chief, Franklin D. Raines, return bonuses
that they earned based on inaccurate financial statements.
Posted on 12/17/2004 5:56:58 AM PST by OESY
WASHINGTON, Dec. 16 - Fannie Mae, the housing-finance giant, for years has fended off critics who contend that the company is too big, too powerful and too risky. But the Securities and Exchange Commission's Wednesday ruling, that Fannie Mae had seriously breached accounting rules, could touch off a chain reaction that results in stricter government controls, legislation limiting its growth and possibly even a change in top management.
Democratic and Republican lawmakers alike demanded on Thursday that senior executives, including the chief executive, Franklin D. Raines, return tens of millions of dollars in bonuses and other compensation that they had earned based on inaccurate financial statements that the company issued from 2001 until this year.
Fannie Mae's board also met on Thursday to be briefed on the S.E.C.'s order that it restate earnings and declare losses of as much as $9 billion as a result of the accounting violations. On Capitol Hill, lawmakers vowed to swiftly overhaul the oversight of the federally chartered company.
The board members concluded their unscheduled meeting early Thursday evening without deciding whether to keep or remove Mr. Raines after the announcement by the S.E.C.'s top accountant that the company had violated two rules. That decision will now force the company to restate its earnings and take steps to significantly raise its capital level. Three board members, joined by Mr. Raines and other regulators, had attended a briefing at the commission by its chief accountant on Wednesday shortly before he announced his decision, people at the meeting said.
But people involved in the inquiry said that board members know that they cannot let the uncertainty hanging over Mr. Raines linger, for the sake of both the company and the markets, and predicted that a decision would be made soon.
Fannie Mae, which for years has been one of the most formidable political forces in Washington, maintained a low public profile. The company declined to comment further about the findings of the S.E.C. staff or the remarks of lawmakers. Nor did it issue any statement in support of its senior management.
In response to the findings of the commission, Democrats and Republicans called on Mr. Raines and other executives to return their bonuses.
Over the last three years, Mr. Raines has made $14 million in salary and bonus and has taken home $25.6 million in incentive pay. As of the end of last year, he held options on 1.9 million shares of Fannie Mae stock, valued at almost $12 million. Fannie Mae also paid almost $200,000 for Mr. Raines's use of company transportation in 2003.
Timothy Howard, the company's chief financial officer, made $4.3 million in salary and bonus over the last three years and received $7.4 million in incentive pay. At the end of last year, Mr. Howard held options on 607,699 shares with a value of $11.5 million. Fannie Mae's stock has fallen a bit since the end of 2003 when it was $75.06. Thursday the shares closed at $69.30, down $1.39. It is impossible to determine how many of the executives' options are exercisable at current prices.
Securities lawyers said that it was murky whether a little-used provision of the landmark corporate law that Congress adopted after the scandals at Enron and other companies could force Mr. Raines and Mr. Howard to forfeit the bonuses and incentive pay they had received.
The provision, Section 304 of the Sarbanes-Oxley Act of 2002, only appears to apply to Fannie Mae starting in 2003, when it first filed stock registration documents with the commission. The company, which as a Congressionally created organization enjoys benefits that other public companies do not have, including an implicit financial guarantee from the Treasury and an exemption from local taxes, is exempt from federal securities laws. It reached an agreement two years ago with the S.E.C. to voluntarily comply with securities rules beginning in 2003. Section 304, which has proven troublesome to apply because of its vagueness, also requires a finding of "misconduct," which the commission has not made.
That could change in coming months.
Lawyers involved in the Fannie Mae investigation underway at the commission and at the Justice Department said that, now that the commission's chief accountant has ruled, the S.E.C. will focus more sharply on the reasons for the violations and the conduct of top executives.
Mr. Raines and other company officials have acknowledged that they approved of the accounting treatment of derivatives and loan prepayments that were the subject of the chief accountant's report. But they have also challenged the conclusions of another agency, the Office of Federal Housing Enterprise Oversight, or Ofheo. That agency precipitated the crisis at Fannie Mae when it found three months ago that Fannie Mae violated accounting rules as part of an effort to manipulate earnings and in at least one year, 1998, meet profit targets that would trigger larger bonuses for executives.
Although lawmakers stopped short of seeking the ouster of Mr. Raines and his top aides, some predicted their departure would likely be forced by the company's board.
"I think the board is well out front and ahead on that issue," said Representative Richard H. Baker, the Louisiana Republican who heads a subcommittee overseeing Fannie Mae. He said that as a result of the findings of the commission and Ofheo, "I think we'll have legislation on the president's desk by summer time."
Mr. Baker also sent a letter to the S.E.C. asking it to examine $200 million in deferred expenses in 1998 and whether, as Ofheo concluded, it was done to meet earnings projections that allowed executives to win their maximum bonuses under an employee incentive program.
Even some of the company's strongest supporters appeared to be shaken in their confidence of its management as a result of the findings.
"To the extent that any executive compensation was enhanced as a result of inaccurate accounting, which led to the achievement of particular earnings targets, it must be repaid to the corporation," said Representative Barney Frank of Massachusetts, the senior Democrat on the House Financial Services Committee and one of the company's most vocal allies on Capitol Hill. "This didn't happen by accident. This is defective corporate governance."
In the Senate, meanwhile, Senator Chuck Hagel, Republican of Nebraska, said he would reintroduce legislation that was not adopted this year but that would strengthen the government's oversight of Fannie Mae and Freddie Mac.
The two companies, created by Congress, play a major role in the economy by buying mortgages from banks and then either holding them or selling them to investors as securities.
Lawmakers demanded that Fannie Mae executives,
including the chief, Franklin D. Raines, return bonuses
that they earned based on inaccurate financial statements.
Fanny Mae
(W. Glasco)
Said I want somebody to tell me what' s wrong with me
Said I want somebody to tell me what' s wrong with me
I feel so much trouble, I got such a misery
Yes I do
And I can hear your name a ringin' all down the line
I can hear your name a ringin' all down the line
I wanna know do you love me
or am I just wasting my time
I wonder
Fannie Mae, baby, won' t you please come home
Fannie Mae, baby, won' t you please come home
Let the seventh debt I cover
I don' t wanna be alone
I know, whooa...poor me
I know, whooa...poor me
Said my heart is through with trouble
It' s such an aching misery
Fannie Mae, baby, won' t you please come home
Fannie Mae, baby, won' t you please come home
Let the seventh debt I cover
I don' t wanna be alone
Fannie mae, baby, won' t you please come home
Fannie mae, baby, won' t you please come home
Let the seventh debt I cover
I don' t wanna be alone
Fannie Mae
Fannie Mae
Fannie Mae
Fast Music BMI
I think the future of mortgages will lie in more and more non-Fannie/non-Freddie investors due to stuff like this.
While there is a problem with the accounting, all GE's contribution to the mortgage market must also be noted.
Without them, the mortgage market would be far less liquid.
Banks that make mortgages sell them to Fannie, Freddie and Ginnie. These agencies pool the mortgages and then sell them to large investment institutions such as pension funds, mutual funds and insurance companies.
This process not only helps banks make mortgages, it also increases the fixed-income return of large institutional investors because mortgages pay a higher rate of return.
In short, these agencies are a big contributor to the mortgage market.
A big problem with Fannie Mae is that is does not know if it is a public or private company. It has all the advantages of both, pays no taxes, doesn't have FCC regulations like a public company, etc. It's political activity arm spends plenty of money to promote various political agendas, such as being a big contributor to MALDEF.
When in doubt, move the decimal point 2 positions to the right.
Comment #3.
Fannie Mae is an great song written by W.Glasco. IMO Southside Johnny and the Asbury Jukes performed an awesome version of the song on the album *I Don't Want To Go Home* Personally, I'd buy the whole CD for all the songs, especially Springsteen's The Fever, Steve Cropper's "Broke Down Piece of Man", and the perennially hot-topic song "It Ain't The Meat It's The Motion" which is guarenteed to make you smile.
Link and click realplayer soundbite if you'd like http://music.barnesandnoble.com/search/product.asp?userid=UH0QyIbAec&EAN=74643418027&ITM=7
The few songs from them, which I've heard, have been really good.
My all time favorite SSJ songs are *The Fever* (already mentioned as a Springsteen number) and *Trapped Again* from the album Heart of Stone. IIRC, it was a collaborative effort between Springsteen, Miami Steve, and Johnny Lyons (aka SSJ). It's hauntingly rockin. IMO many of Springsteen's best songs were written for others such as SSJ material, *Fire,* (Robert Gordon does a better version than the Pointer Sisters) and Patti Smith's *Because The Night.*
All of which has nothing to do with fannie mae insolvency. Ah, but sometimes we must savor the simple distractive delights when problems appear.
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