THE REAL SCANDAL AT FANNIE MAE ( 2004)

The Truth About Fannie
THE REAL SCANDAL AT FANNIE MAE.
By Daniel Gross
Posted Thursday, Oct. 7, 2004, at 4:44 PM ET

Fannie Mae, the federally chartered company that buys home mortgages and sells them as securites, is receiving a highly public fanny-kicking. After accounting issues arose last summer at Fannie's smaller and younger sibling, Freddie Mac, the Office of Federal Housing Enterprise Oversight began to examine Fannie Mae's accounting practices. The result of the probe, detailed in a 211-page report issued last week, paints Fannie Mae as an Enron-in-the-making. At the company that prides itself on being a cuddly enabler of the American dream, OFHEO unearthed a "pervasive" misapplication of accounting standards, poor internal controls, and—the most headline-worthy charge—a pay structure that rewarded executives for meeting earnings goals, which encouraged executives to manipulate earnings to hit the number.
In contentious hearings yesterday before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Fannie Mae CEO Franklin Raines and other executives, who denied wrongdoing, were raked over the coals. (Click here to read an "Assessment" of Raines.)

The current disputes are couched in the language of financial arcana—accounting standards and the tricky task of valuing derivatives. But at root, Fannie's troubles concern psychology more than bookkeeping.