Fannie Mae’s Current Execs Are Cleared

A report detailing $11 billion in accounting errors at Fannie Mae blamed former management but found no fresh material discrepancies, lifting one of the darkest clouds that has hung over the mortgage finance giant for more than a year.

Fannie Mae’s stock, which at one point had lost 45% of its value, or about $34.5 billion, because of the probe, rallied on release of the report, which cleared current management of any significant role in the debacle.

The investigation by former U.S. Sen. Warren B. Rudman (R-N.H.) pointed the finger of responsibility squarely at Fannie Mae’s former chief financial officer, Timothy Howard, and its former controller, Leanne Spencer.

But the long-awaited Rudman report said it did not find that former Chief Executive Franklin D. Raines knew the company’s accounting departed from generally accepted practices in significant ways.

“We did find, however, that Raines contributed to a culture that improperly stressed stable earnings growth and that, as the chairman and CEO of the company from 1999 through 2004, he was ultimately responsible for the failures that occurred on his watch,” the report stated.

Accounting practices in virtually all areas under review by the Rudman team were not consistent with generally accepted accounting principles, the report said.

What’s more, Fannie’s management team in many instances was aware of that, Rudman said, and the report offered voluminous detail of the misapplication of accounting rules aimed at adjusting the company’s earnings.

It noted that Howard declined repeated requests to be interviewed in the investigation. Spencer initially cooperated but declined further interviews after investigators found a document she had failed to disclose.

That document related to an incident in which Fannie Mae decided to improperly defer an expense. That led management to make subsequent adjustments that ultimately pushed earnings to a level that triggered maximum bonuses -- the one instance Rudman found evidence that management applied bad accounting to maximize bonuses, not to just smooth earnings.

Although U.S. agencies are continuing their probes, Wall Street and Washington were looking to the Rudman report for any sign that Fannie’s troubles were more extensive than already disclosed, which could trigger a renewed push on Capitol Hill to overhaul the company’s supervision and curtail its business.

Seeing no such sign, investors pushed Fannie Mae’s stock up $1.23 to $57.14.

Raines’ lawyers, in a letter to Rudman’s team, said that the former executive took prudent steps to ensure accurate accounting was achieved and that he could not be blamed for “cultural deficiencies” at the company.

Lawyers for Howard and Spencer could not be reached for comment.

Fannie Mae and Freddie Mac are shareholder-owned but government-sponsored enterprises charged by Congress with boosting homeownership by keeping mortgage money flowing.

To do this, they buy mortgages from lenders, giving lenders money to make more loans. Fannie Mae and Freddie Mac then pool the loans into securities for sale to investors.