December 1, 2004
Raines Stays Cool Under Fire
Franklin Raines has survived another round of scrutiny at Fannie Mae — but not without concessions — as the nation’s largest source of financing for home mortgages has its accounting practices investigated. In an October congressional hearing, CEO Raines deflected allegations made by the Office of Federal Housing Enterprise Oversight (OFHEO) that his company engaged in accounting improprieties that hid earnings volatility, disregarded accounting standards, and in one case, secured $3 million in bonuses for Raines and his predecessor, James A. Johnson.
“We take this report seriously,” Raines told members of the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.
Republican and Democratic lawmakers sparred over the 200-page report, released by OFHEO Director Armando Falcon Jr. The report charged that there are “serious safety and soundness concerns,” about how Fannie Mae executives have been running the enterprise.
Shortly after the report was released, and after its stock dropped 15%, Fannie Mae agreed to raise its core capital level. The report suggests that capital may have been overstated by as much as $7.5 billion. Last year, OFHEO increased the minimum capital requirement for Fannie Mae’s competitor, Freddie Mac, by 30%. Both are government-chartered but publicly traded companies that buy mortgage loans from lenders, providing the lenders with funds to make new home loans.
Also following the report, the Securities and Exchange Commission upgraded its informal investigation to a formal one, allowing federal regulators to subpoena company documents and to require the testimony of company executives and employees, and Fannie Mae announced a decision to delay its third quarter earnings report.
During the hearing, Fannie Mae’s former financial accounting manager emerged as the whistleblower. Roger Barnes claimed he was forced out of the company in October of 2003 for what he described as a work environment that had grown hostile.
“Fannie Mae espouses a policy of adherence to good corporate governance. … The reality, however, is far different,” Barnes claimed in a 25-page written testimony. “The atmosphere and culture … is one of intimidation, restraint of dissenting opinions, and pressure to be part of the ‘team.'”
Barnes alleged that beginning in 1999, he had alerted management that Fannie Mae’s accounting practices violated the industry’s generally accepted accounting principles, specifically Financial Accounting Standard 91. Barnes claimed he “repeatedly advised management that it appeared that AIMS [the company’s amortization integrated modeling system] had been designed and employed to manipulate the level of income reported by Fannie Mae in its earnings statement and other public filings.”
In July, BLACK ENTERPRISE reported that the Bush administration wanted the Treasury Department to have final authority over Fannie Mae products, capital levels, and liquidation in a crisis. Federal Reserve Chairman Alan Greenspan asked Congress to place limitations on Fannie Mae and Freddie Mac, fearing that because the lenders had experienced so much growth, an accounting mishap could result in major economic crisis. Over the past decade, Fannie Mae has increased mortgage holdings nearly five times to today’s $895 billion. Yet, with its $989.3 billion in total assets (as of June 30), the nation’s second-largest financial