WASHINGTON – Fannie Mae's two top executives told lawmakers Thursday they are thoroughly overhauling and reforming the mortgage giant as it labors to emerge from its $11 billion accounting scandal.
The government-sponsored company pledged to complete by year's end the restatement of its earnings back to 2001 — expected to be one of the largest restatements in U.S. corporate history.
Daniel Mudd, the president and CEO, acknowledged that Fannie Mae had broken a public trust. But he said the company today was nearly unrecognizable from before.
"We have made changes. We are making progress. And we have much more to do," he said in testimony prepared for delivery at a Senate Banking Committee hearing.
"There is absolutely no routine, process or control anywhere in the company that is beyond the scope of overhaul and improvement to the highest standard," Mudd said.
Mudd and Fannie Mae Chairman Stephen Ashley were appearing before the committee as pressure mounted from government officials seeking to rein in the company's growth.
Fannie Mae also is being to recover bonus money from some company officials. Current and former executives of the government-sponsored company reaped hundreds of millions of dollars in bonuses in a deceptive accounting scheme over six years, federal regulators have alleged.
Senators denounced the pervasive accounting fraud and unethical conduct detailed in the regulators' allegations against Fannie Mae. Some drew parallels with Enron. Several urged congressional action to curtail the massive mortgage holdings of Fannie Mae and its smaller government-sponsored sibling, Freddie Mac.
"A shocking and disturbing picture of irresponsible behavior," declared Sen. Wayne Allard, R-Colo.
Washington-based Fannie Mae, which is the second-largest U.S. financial institution after Citigroup Inc. and the second-biggest borrower after the federal government, finances one of every five home loans in the country. Its long-prevailing image of prestige and excellence was a sham, the Office of Federal Housing Enterprise Oversight said in a scathing report issued last month, which described what the regulators called an arrogant and unethical corporate culture.
In a settlement announced May 23, the SEC and OFHEO fined Fannie Mae $400 million — one of the largest civil penalties ever in an accounting fraud case. The company also agreed to temporarily cap its mortgage holdings at $727 billion.
The Bush administration has long been critical of Fannie Mae and Freddie Mac, and officials have pointed to recent accounting scandals at both companies to bolster the case that their massive mortgage portfolios are improperly managed and pose a risk to the financial system.
On Tuesday, Housing and Urban Development Secretary Alphonso Jackson and Randal Quarles, Treasury undersecretary for domestic finance, said their departments were starting special reviews of the two companies' financial operations. The reviews could result in limits on their growth and their expansion into new areas of business.
Congress, meanwhile, has been weighing legislation that would reduce the companies' massive mortgage portfolios.
And last week, OFHEO acting director James B. Lockhart said his agency will go after some Fannie Mae executives to recover bonus money if the company itself fails to do so.
Franklin Raines, the ousted former chief executive of Fannie Mae, declined the Senate panel's invitation to testify at Thursday's hearing. So did Thomas Gerrity, chairman of the Fannie Mae board's audit committee, whom the company recently decided to remove from that key position.
Rep. Richard Baker, R-La., chairman of the House panel that oversees Fannie Mae and Freddie Mac, this week asked the Justice Department to investigate whether Raines and former chief financial officer Timothy Howard lied to Congress in sworn testimony in 2004. Justice has been conducting a criminal investigation of Fannie Mae.