WASHINGTON – At turns defiant and emotional, Fannie Mae's (FNM) top executive denied that the mortgage giant's manipulated its earnings and questioned an investigative report of the company's accounting practices as factually deficient.
Fannie Mae (search) chief executive Franklin Raines (search) addressed a House committee hearing Wednesday in his first public appearance since Sept. 22, when investors learned of an accounting crisis at the company, amid news of a Securities and Exchange Commission (search) inquiry.
Testifying under oath, Raines and chief financial officer Timothy Howard insisted that the regulators' allegations of accounting improprieties and management misdeeds represent an arguable interpretation of complex rules.
Raines said his company "looked for the facts" in the regulators' report of their investigation but had found none. "None, other than their calculations that say if you subtract one number from another you get this result," he said.
Lawmakers closely questioned Raines about an instance in 1998 in which accounting rules were said to have been deliberately violated so that top executives at the government-sponsored company could collect full bonuses.
"This is a very serious allegation and I deny that it occurred," Raines said.
The bonuses were tied to an earnings-per-share target of $3.23 for Fannie Mae stock that year — and company profits came within pennies of that goal.
New data made public at the hearing by Rep. Richard Baker, R-La., chairman of the House Financial Services panel, show that Fannie Mae executives collected $245 million in bonuses in the past five years.
The Office of Federal Housing Enterprise Oversight (search) has raised the possibility of a management overhaul at Washington-based Fannie Mae, which finances one of every five home loans in the United States.
The company — the second-largest financial institution in the country behind Citigroup — also faces a criminal investigation by the Justice Department.
The former Fannie Mae accountant who raised questions about the company's calculations, meanwhile, said he took his concerns directly to Raines and Howard back in 2002 and asked them to investigate. He described a culture of intimidation at the company in which dissenting opinions are suppressed and said he faced retaliation for having spoken.
The regulators in the Office of Federal Housing Enterprise Oversight have said that information provided by Roger Barnes, a manager in the Controller's Division who left Fannie Mae in October 2003, was important to their investigation of the company's accounting.
"Fannie Mae took the issues raised by Mr. Barnes very seriously," company spokeswoman Janice Daue said in a statement responding to his testimony. She said three separate offices in Fannie Mae investigated Barnes' allegations and that when he left the company, he stated in writing that he believed his concerns had been "appropriately addressed."
Daue also disputed Barnes' portrayal of the company's culture, which she called "a culture that encourages employees to raise issues."
Fannie Mae and Freddie Mac (FRE) wield influence on Capitol Hill and are heavy contributors to lawmakers of both parties. Democrats, who have staunchly defended the companies against Republican attempts at tighter government regulation of them, turned their criticism Wednesday against regulators who alleged accounting misdeeds at Fannie Mae.
Shares of Fannie Mae, which finances one of every five home loans in America, have lost some $14 billion in value since the allegations of accounting improprieties became known. They rose $1.45 to close at $67.45 Wednesday on the New York Stock Exchange. The shares have fallen about $10 in the past month.
Raines, a former White House budget director in the Clinton administration, is one of Washington's most prominent and politically savvy figures and known to be remarkably self-contained. He showed a rare loss of composure at some points during three hours of testimony. His voice broke when he spoke of the difficulty of explaining the Fannie Mae situation to his daughters.
OFHEO has singled out Howard for blame in the scandal, saying in its report that he failed to provide adequate oversight.
Howard testified: "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."
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.
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.
Fannie Mae and Freddie Mac pump money into the home mortgage market by buying and guaranteeing repayment of billions of dollars of home loans each year from banks and other lenders, then bundling them into securities that are resold to investors. Their stock and debt are widely held by investors worldwide.