Fannie Fiasco

From Office of Federal Housing Enterprise Oversight (OFHEO):


“Washington, DC – James B. Lockhart, Acting Director of the Office of Federal Housing Enterprise Oversight (OFHEO), today released its Report of the Special Examination of Fannie Mae. The report details an arrogant and unethical corporate culture where Fannie Mae employees manipulated accounting and earnings to trigger bonuses for senior executives from 1998 to 2004. The report also prescribes corrective actions to ensure the safety and soundness of the company.”

““The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,” said Lockhart. “Our examination found an environment where the ends justified the means. Senior management manipulated accounting; reaped maximum, undeserved bonuses; and prevented the rest of the world from knowing. They co-opted their internal auditors. They stonewalled OFHEO,” Lockhart said.”

“During the period covered by this report—1998 to mid-2004—Fannie Mae reported extremely smooth profit growth and hit announced targets for earnings per share precisely each quarter. Those achievements were illusions deliberately and systematically created by the Enterprise’s senior management with the aid of inappropriate accounting and improper earnings management.”

“By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders. Earnings management made a significant contribution to the compensation of Fannie Mae Chairman and CEO Franklin Raines, which totaled over $90 million from 1998 through 2003. Of that total, over $52 million was directly tied to achieving earnings per share targets.”

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39 Responses to Fannie Fiasco

  1. Metroplexual says:

    My brother in law worked there in ’98 to ’01. Raines was arrogant and should go to jail. I hope this is the smoking gun!

  2. grim says:

    Trading still halted on FNM?

  3. Anonymous says:

    All bubbles caused by excess leverage,lax lending standards, wild speculation / get rich mentality and unethical/criminal activity.

    The biggest bubble in history will cause one big hangover.

  4. Anonymous says:

    For every $2.5 billion billion in equity Fannie Corruption has $100 Billion in assets and debt tied to it.

    Highly leveraged organization.

  5. Anonymous says:

    regulated banks are usually 8:1 or 12:1 Corrupt fannie is 50:1!!!!

  6. Richard says:

    there better be some consequences to their actions which should include jail time and major fines. who wants to bet the executives end up keeping far more than any penalties? welcome to fat cat america where you can buy your way out of most anything.

  7. Anonymous says:

    If FNM goes down, will taxpayers have to fund a bailout?

  8. Don’t get too caught up with this story realtive to real estate.

    From a Corporate Governance perspective, this ranks up there with all the heavy hitters [HealthSouth, WC, Enron, Qwest etc.], with a nice GSE backstop.

    However, the impact on RE and the mortgage market is overstated [I’m sure the company’s PR machine is the culprit]. There are already many other financial institutions stepping up to fill the void.

  9. Anonymous says:

    Real Estate???How about relative to fairness? This really pisses me off as a shareholder in private companies held accountable for this type of behavior.

    Stock in companies like United Healthcare tanks at the slightest whiff of impropriety of options granted.

  10. Anonymous says:

    Thanks to Congress’s love affair with deregulation, Fannie was able to continue for so many years as nothing but a bloated coporate fraud

  11. Metroplexual says:

    You forgot to add, a heavily subsidized coporate fraud.

  12. Anonymous says:
    “New Tool for Tracking Housing Prices
    Audio for this story will be available at approx. 6:00 p.m. ET

    Talk of the Nation, May 23, 2006 · Traders at the Chicago Mercantile Exchange think the U.S. housing market may be slowing down and they’ve got the numbers to prove it, thanks to Yale economist Robert Shiller. Shiller explains a new tool he co-wrote to track housing prices and establish a market in residential real estate futures.”

  13. Anonymous says:

    Don’t look now, but FNM’s stock price is soaring! The biggest government subsidized corporate fraud in history continues to live long and prosper in Bizarro World.

  14. pesche22 says:

    nasty selling into the close today
    this will effect housing sooner
    rather than later.

  15. grim says:

    “We’re going to drop significantly, but it’s not a balloon bursting,” Lereah says. “This is a soft landing for the housing markets.”

    Bonus points for anyone that can decipher what the heck Mr. Lereah means by this.


  16. Anonymous says:

    for all you speculators out there -the Chicago Merc now offers you the ability to trade futures on various real estate markets like LA, Chicago, NYC, etc. From the CME website:

    CME Housing futures and options are the first comprehensive financial tools that make it possible to trade U.S. real estate values. These products provide opportunities for protection or profit in up or down markets, and extend to the housing industry the same tools for risk management and investment that previous CME innovations have brought to agriculture and finance.

  17. Pat says:

    Not just for speculators, these futures mkts, according to Schiller in his interview today (audio available at

    He seems to see it as the next step in perfecting the housing market, allowing those who want to hedge future drops and preventing future bubbles.

    I guess this is a great product to launch right now and housing is more of a commodity than ever??

  18. Anonymous says:

    Case-Shiller price history for the NY Metro area, Jan ’04 to Feb ’06, taken from the S&P website. Note the slowdown in growth. Soon to see a decline?

    163.63 Jan ’04
    212.82 Feb ’06

  19. Anonymous says:

    Bonus points for anyone that can decipher what the heck Mr. Lereah means by this….

    He means, “Oh shit, I’m busted. I better find a way out of here before I get my ass kicked.”

  20. seattle price drop says:

    I heard in an interview with OFHEO’s James Lockhart that FNM will no longer be able to hold mortgages. they can still sell them off but no holding themselves.

    Won’t this have an affect on the industry? Can sby please explain?

    thanks for a terrific blog Grim.

  21. Roadtripboy says:


    I guess if housing prices plummet 50% than that is a “significant drop”. And I guess it could be considered a “soft landing” in the sense that a 50% drop is much softer than an 80% drop.

    It sounds like CYA time for Lereah; no matter what happens with the housing market he could point to these comments and say, “see? I was right!”

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