FANNIE MAE Probe uncovers serious problems

Regulators question whether management can make necessary changes.
WASHINGTON (AP) -- Federal regulators have raised the possibility of removing the management of mortgage giant Fannie Mae after finding accounting problems they described Thursday as more serious in a key area than those that brought the ouster of top executives at rival Freddie Mac.
The findings by the Office of Federal Housing Enterprise Oversight warrant "immediate remedial action," the agency's director said in a letter to the Fannie Mae directors that was released Thursday.
In addition, "we must consider the accountability of management and whether we have sufficient confidence in management to fully implement these corrective measures and bring about broad cultural and operational changes," Armando Falcon wrote in the letter dated Monday. "The analysis and findings of this report make it difficult to assert such confidence."
The Securities and Exchange Commission also is investigating the accounting of government-sponsored Fannie Mae, the second-largest U.S. financial institution behind Citigroup Inc.
Meanwhile, Fannie Mae disclosed Thursday that it had revised its employment agreements with the three top executives -- Chairman and Chief Executive Franklin Raines, Chief Operating Officer Daniel Mudd and Chief Financial Officer Timothy Howard -- to ensure that if they were fired, they wouldn't get huge severance packages. The changes were made in response to previous comments by OFHEO, the Washington-based company said.
Pervasive problems
The OFHEO regulators' report, made public Wednesday after an 8-month-old investigation, found pervasive accounting problems the agency says cast doubt on the company's past earnings reports and even its financial soundness.
In a drive to meet Wall Street's expectations, management at Fannie Mae "deliberately developed and adopted" inappropriate accounting policies, supported widespread violations of generally accepted accounting principles, tolerated lax internal controls and failed to properly investigate an employee's concerns about accounting, the report said.
The 210-page report also cited the possibility of deliberate accounting maneuvers designed to bring bigger bonuses to executives.
The OFHEO investigation continues, and the regulators haven't yet quantified the result of the faulty accounting they said was widespread at the company. Agency officials said Thursday they didn't know whether Fannie Mae will have to restate its earnings for any period from 2001 to 2003, or whether its earnings overall might have been overstated or understated.