The Wheels of Justice Flatten Fannie Mae

The hubris and greed of the top executive team at Fannie was also Enron-like. A close reading of the numbers shows that the company was run by aggressive risk takers who wanted to make large bets to ensure the company hit the earnings targets given to Wall Street. Particularly in 2002, Raines and his top managers left the team without anywhere near enough protection against adverse moves in interest rate moves. When the derivatives losses piled up as a result, the misapplication of FAS 133 very conveniently meant that Fannie didn't have to book those losses through earnings. Detox warned readers to include the losses in any attempt to value Fannie Mae.

As with many scandal-hit companies, Raines and his team also collected millions of dollars in the form of stock options. The latest stock option award was massive, contributing to Raines' $20 million package in 2003, but there is a good chance that, because of the need to restate numbers, OFHEO will demand Raines repay that sum. The defiant stance taken by Raines in defense of Fannie's accounting before a House committee in October did evoke the infamously aggressive Congressional testimony of Enron's former CEO Jeff Skilling.

Raines defiantly stated before the committee that Fannie's "financial statements were certified by me and by our Chief Financial Officer, Tim Howard, after a thorough process, and audited by our independent auditor, KPMG." And if Raines is Skilling, and Howard a possible Andrew Fastow, does that make KPMG the next Andersen? If the accounting firm is found to have collaborated in a scheme to keep FAS 133 losses out of earnings, the firm will be seriously damaged.

Beltway Blunders

But in some ways the Fannie mess is much worse than any of the big recent corporate scandals. Fannie betrayed public trust on a massive scale. And its decline into a accounting scandal endangers the health of the U.S. housing market. Fannie was set up by a congressional charter to provide liquidity to the housing market. It moved way beyond its main business of guaranteeing mortgages to buying them and holding them on its books. It now has over $900 billion of mortgages on its books.