WASHINGTON -- Fannie Mae's federal regulator said yesterday that the company's executives and board of directors were to blame for the accounting scandal that rocked the big mortgage company and said the firm must pay a $400 million fine.
A stinging 348-page report by the Office of Federal Housing Enterprise Oversight said that senior management manipulated accounting at the giant company, that Fannie Mae "stonewalled" government investigators, and that Fannie Mae should further investigate employees associated with the accounting scandal.
The OFHEO review, involving nearly 8 million pages of documents, details what the agency describes as an arrogant and unethical corporate culture, calling Fannie Mae's image of company prestige and excellence a sham. It said employees manipulated accounting so that senior executives could collect millions in bonuses from 1998 to 2004.
"The image of Fannie Mae as one of the lowest-risk and 'best in class' institutions was a facade," said James Lockhart, acting OFHEO director. "Senior management manipulated accounting, reaped maximum, undeserved bonuses and prevented the rest of the world from knowing."
OFHEO and the Securities and Exchange Commission announced a settlement with Fannie Mae yesterday in which the firm agreed to pay the $400 million fine.
Most of the money will go back to investors, the SEC said.
OFHEO's report makes 13 recommendations for Fannie Mae, including using independent consultants to verify compliance with the regulator's rules, developing new guidelines for its board and a "review" of people who are mentioned in the report.
The office also said it's ordering Fannie to cap growth of its huge investment portfolio, back to the $727 billion it held as of Dec. 31 last year. Fannie Mae and sister company Freddie Mac hold about $1.4 trillion in mortgage-backed securities. Those big holdings put the U.S. economy at risk if there's a crisis at either company, the White House contends.
Getting limits lifted could take "years," Lockhart said at a news conference after the report was released.
Fannie Mae didn't admit or deny wrongdoing. But Chief Executive Officer Daniel H. Mudd said the company would work with OFHEO to remedy accounting policies. "We have all learned some powerful lessons here about getting things right and about hubris and humility," Mudd said in a statement.
Mudd is doing a good job as CEO, Lockhart said. But the director acknowledged that Mudd was employed by Fannie during the period covered by the report. Investigation of individuals is continuing, Lockhart and SEC Chairman Christopher Cox said.
The report was the second in four months: A study issued by former Sen. Warren B. Rudman laid blame primarily on former executives for Fannie Mae's September 2004 accounting debacle.
Fannie Mae's stock value has dropped about 35 percent since its regulator accused the company of manipulating financial results to boost executives' bonuses. Franklin D. Raines, a former Clinton administration budget director, resigned as CEO in December 2004. The chief financial officer also quit after the scandal.
The company continues to face a Justice Department investigation and shareholder lawsuits.
Fannie Mae is in the midst of restating earnings back to 2001.
The restatement could cost the company more than $10 billion.
The Associated Press contributed to this article.