Fannie Mae's fall from grace

Scandal escapes attention

Published August 13, 2006 at midnight

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If the largest corporate scandal in U.S. history was Enron, in which shareholders lost as much as $60 billion, what's the next largest instance of greed, mismanagement and excess?

Try Fannie Mae, the nonprofit home-lending behemoth. Key executives misstated earnings by nearly $11 billion so they could pocket million-dollar bonuses. And those shenanigans caused the corporation's stock price to plummet - from nearly $80 in September 2004 to less than $48 last week. Shareholders have lost more than $30 billion.

And yet the outrages at Fannie Mae have been largely ignored, while other corporate scandals - Enron, WorldCom, Qwest, Tyco, Adelphia - are seared in the public's consciousness. Perhaps that's because Fannie Mae's noble mission of making homeownership more affordable has given some people the perception that it can do little wrong.

For instance, Ralph Nader's business watchdog group Citizen Works maintains a "corporate scandal sheet" that chronicles 41 major instances of stock manipulation, accounting fraud or other forms of financial mismanagement dating to the late '90s. Though the list has been updated this month, Fannie Mae isn't on it.

Fannie Mae is publicly traded on the New York Stock Exchange; after Citigroup it's the second-largest financial institution in the country.

But it is chartered by the federal government, which means, as National Review's Byron York reported in June, "it does not have to pay state and local income taxes, and it is not subject to bankruptcy law. It can borrow money at a lower rate than anyone else except the federal government itself."

And in recent years its managers figured out ways to pad their bank accounts through creative accounting - that is, by cooking the books.

What happened? For years, Fannie Mae bundled and resold mortgages to private investors. But as interest rates began climbing, management started holding onto its mortgage portfolio as a hedge against rising rates. This pumped up profits, and fattened managers' compensation, which was tied to earnings reports. An analysis published in May by the Office of Federal Housing Enterprise Oversight, the agency that monitors Fannie Mae, found that its executives overstated earnings by $10.6 billion.

Former Clinton administration budget chief Franklin Raines, who was Fannie Mae's CEO from 1998 to 2004, collected some $90 million during his tenure - $52 million of that in bonuses he got by what the oversight office says were manipulated earnings reports. Not bad for the nonprofit sector.

Meantime, former Deputy Attorney General Jamie Gorelick, who was Raines' top lieutenant at Fannie Mae from 1998 to 2002, also cashed in $26.46 million, nearly $15 million of that in bonuses.

More muscular oversight could prevent future abuses; Raines both nickel-and-dimed regulatory staffing and leaned on sympathetic lawmakers, urging them to ignore the scandal.

Last year, a bill was introduced in the Senate that would grant more independence to the body that regulates Fannie Mae and limit compensation to current and former officers.

We would prefer that both Fannie and cousin Freddie Mac were cut loose from the protection of Uncle Sam. But since that's not possible politically, the Senate bill would bring overdue scrutiny to these pampered giants.

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