WASHINGTON – The former Fannie Mae (FNM) accountant who raised questions about the mortgage giant's bookkeeping said Wednesday that he took his concerns directly to chief executive Franklin Raines (search) in 2002 and asked him to investigate.
The disclosure by Roger Barnes, who left Fannie Mae (search) last November, came as Raines and chief financial officer Timothy Howard defended the company's accounting and told Congress that regulators' allegations of earnings manipulation represent an interpretation of complex rules.
The regulators have said that information provided by Barnes was important to their investigation of the government-sponsored company's accounting.
"I urged Mr. Raines and Mr. Howard to investigate the issues identified," Barnes said in written testimony submitted for a hearing by the House Financial Services subcommittee that oversees Fannie Mae and Freddie Mac (FRE), its smaller rival in the multitrillion-dollar home mortgage market.
"Neither Mr. Raines nor Mr. Howard, nor anyone from their staffs, investigated these concerns or took corrective action," he said. "Thus, the practices I had identified continued, and I faced continuing reprisal for raising concerns about these issues."
Barnes, who was a manager in the Controller's Division, said that he anonymously sent the two executives a memo on Sept. 23, 2002, calling himself a Finance Division Manager. The information he provided was "easily traceable" to him because he was among only a handful of managers who had detailed data on the company's process for accounting for expenses over time, said Barnes.
At Fannie Mae, he said, "The atmosphere and culture, particularly within the Controller's Division, is one of intimidation, restraint of dissenting opinions and pressure to be part of the 'team,'" giving Raines and Howard the numbers they sought to please the markets.
Raines and Howard were making their first public appearance since news of the allegations and a Securities and Exchange Commission (search) inquiry into government-sponsored Fannie Mae surfaced on Sept. 22.
"These accounting standards are highly complex and require determinations over which experts often disagree," Raines said in testimony prepared for his appearance before the panel.
In his written testimony, Raines noted that Fannie Mae's outside auditor, KPMG, had endorsed the company's application of accounting rules.
Some of the findings by the Office of Federal Housing Enterprise Oversight (search) "involve highly detailed issues that I would not normally focus on in my role as CEO," Raines said.
OFHEO Director Armando Falcon, testifying under oath at the hearing, asserted that Fannie Mae improperly put off booking income to a future reporting period "to create a 'cookie jar' reserve that it could dip into whenever it best served the interests of senior management." Those interests included smoothing out volatility in earnings from quarter to quarter and meeting earnings-per-share targets linked to bonuses for executives, Falcon said.
Raines disputed the regulators' allegation that in one instance in 1998, accounting rules were deliberately violated so that top executives could get full bonuses.
"This is a serious allegation, and we strongly disagree with it," said Raines.
Lawmakers have cited his assurances to investors a little over a year ago that Fannie Mae, which finances one of every five home loans in America, had not "undertaken any transactions to distort our true financial condition."
Raines and Howard have been put on the defensive by a recent government report that criticized Fannie Mae's "culture and environment" for making "these problems possible." The Washington-based company, which is the second-largest financial institution in the United States, is also facing a criminal investigation by the Justice Department.
OFHEO has singled out Howard for blame in the scandal, saying in a report of the regulators' ongoing investigation that he failed to provide adequate oversight.
In his prepared testimony, Howard said, "All of my judgments regarding accounting issues were made in openness and good faith, with the goal of providing investors with the most meaningful and understandable information possible."
No specific finger has been pointed at Raines, a prominent Washington and business figure who was a White House budget director under President Clinton. Regulators have raised the possibility of a management overhaul, however.
It is "difficult to assert ... confidence" in management's ability to change the company's culture and operations, OFHEO's Falcon told the Fannie Mae board last month.
Fannie Mae shares have tumbled 17 percent in recent weeks, and some in Congress and on Wall Street have called for the removal of Raines and other senior executives.
As CEO, Raines certified in writing the accuracy of Fannie Mae's financial results, so he would have violated a law — enacted in response to the 2002 corporate scandals — had he been aware of the accounting irregularities when he signed off.
In mid-2003, after the accounting scandal erupted at Freddie Mac, Raines said his company didn't "have any of the same issues" and hadn't "undertaken any transactions to distort our true financial condition."
Freddie Mac restated some $4.5 billion in earnings last year, ousted top executives and was fined a record $125 million in a settlement with regulators.
The result of the inquiries by Congress and the government could eventually ripple out to millions of Americans if they have to pay higher rates for new home mortgages or for refinancing, some analysts say. Those could be among the consequences if Fannie Mae is required to scale back its purchases of mortgages and forced to pay higher rates on its nearly $1 trillion in debt held by investors in the United States and worldwide.
Fannie Mae and Freddie Mac, while not directly guaranteed by the government, have special privileges including the ability to borrow directly from the U.S. Treasury. In return, they are charged with enabling more low-income and minority people to buy homes.
The implicit links with the government allow Fannie Mae and Freddie Mac to typically borrow money at lower rates than the competition. Those funds are then used to purchase and guarantee billions of dollars of mortgages from banks, many of which are then packaged into securities that are resold on Wall Street.