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Fannie Mae's disgraceful bonuses

The corporate sewer of financial deceit and greed, littered with the likes of Enron's rotting carcass, now has a new netherworld lord of moral putrescence - the once shining mortgage giant Fannie Mae. It's not easy to out-Enron Enron, but Fannie Mae did. Under a succession of politically wired executives, it used its clout to manipulate earnings while holding off scrutiny of its accounting practices to one end: outsized executive bonuses.

The con is over. Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight, wrung a confession of sorts out of the quasi-governmental corporation. The company will pay a $400-million penalty and take corrective measures, while admitting no wrongdoing. Some executives clearly did wrong, however, and could and should be pursued for possible criminal acts.

"The image of Fannie Mae as one of the lowest-risk and 'best in class' institutions was a facade," said James Lockhart, the regulatory agency's acting director. "Our examination found an environment where the ends justified the means."

That troubled path began under CEO James Johnson, who headed Walter Mondale's unsuccessful presidential campaign. Using aggressive financial tactics and the company's growing political clout to avoid oversight, Fannie Mae prospered. Or so it seemed.

Under Johnson's successor, Franklin Raines, who had served in the Carter and Clinton administrations, the earnings game spun out of control. Its yearly double-digit growth rate seemed too good to be true, and it was. "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 said.

Fannie Mae was never meant to be a high-flying Wall Street darling. Given special protection from taxes and competition, the company was supposed to make home loans readily available and affordable by bundling and selling mortgages. When it began to hold large amounts of mortgages itself, hedging the portfolio against interest rate fluctuations, it drew the wrath of none other than then-Fed Chairman Alan Greenspan.

Throughout Fannie Mae's downfall, its top executives raked in obscene amounts. More than half of Raines' $90-million in pay over five years was tied to earnings targets apparently reached through financial chicanery. Even after Johnson retired as chief executive, he was kept on as a paid consultant - adding $390,000 a year to his $852,000 pension, two staffers, a car and driver.

How does such a lifestyle skew values? Last year, when the company was crumbling under the weight of its own excesses, Johnson offered to "sacrifice" - by reducing his fee to $300,000 and giving up the company car. Former and current executives should be called to account for their behavior.

Fannie Mae is a warning to us all, especially Congress. When it gives an advantage to a company but neglects the necessary oversight, it is a formula for disaster.

[Last modified May 25, 2006, 05:31:36]