Fannie Mae: unethical.
The settlement deal was announced as OFHEO released an extraordinary report documenting what OFHEO Director Joseph Lockhart calls Fannie Mae's "arrogant and unethical culture."
"The image of Fannie Mae as one of the lowest-risk and 'best in class' institutions was a facade," says Lockhart. "Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing. They co-opted their internal auditors. They stonewalled OFHEO."
"The combination of earnings manipulation, mismanagement and unconstrained growth resulted in an estimated $10.6 billion of losses, well over a billion dollars in expenses to fix the problems, and ill-gotten bonuses in the hundreds of millions of dollars," Lockhart says.
During the period covered by this report--1998 to mid-2004--Fannie Mae reported extremely smooth profit growth and hit announced targets for earnings per share precisely each quarter.
Earnings management made a significant contribution to the compensation of Fannie Mae Chairman and CEO Franklin Raines, which totaled over $90 million from 1998 through 2003. More than half of Raines' income, as well as the other highest compensated executives at Fannie Mae, came from bonuses and arrangements directly tied to achieving earnings per share targets.