A Seismic Shift Under The House Of Fannie Mae

Few longtime observers of Fannie Mae and of Mr. Howard expect that crimes will be found. "The guy is as honest as the day is long and the targeting of Tim Howard is an unfortunate byproduct of larger events," said Martin D. Eakes, chief executive of the Self-Help Credit Union, a lender to low-income borrowers based in Durham, N.C., who has alternately worked closely with and battled Fannie Mae on various mortgage issues. "This will never, ever be like Enron. Mark my words."

Maybe so. But the confrontation between Fannie Mae and its critics already amounts to a clash of titans, both in Washington and New York, where Fannie Mae's lobbyists and its executives are accustomed to striding unencumbered through the halls of Congress, the financial byways of Wall Street and the finest dining rooms and clubs.

For at least the last decade, the company has been criticized in Congress and by Washington research groups. Detractors accuse it of benefiting unfairly from its status as a quasi-public enterprise, of not truly meeting its mission of providing affordable housing, and of being too loosely regulated. More recently, Fannie Mae's explosive growth has drawn the attention of Alan Greenspan, the Federal Reserve chairman, who raised concerns earlier this year that a collapse or trouble for the company posed threats to the economy. Mr. Greenspan advocated the complete privatization of the company, a view that has been pressed elsewhere in Washington as well.

"It's a resistance to Fannie in Washington that is one part mortgage industry civil war, one part conservative ideological crusade to try to rein them in or force them to privatize," said Charles A. Gabriel Jr., senior Washington analyst at Prudential Securities. "Having faced down the mortgage industry civil war and the ideologues, what finally tripped them up is they ran afoul of the shifting zeitgeist on accounting."

Amid all of this, Mr. Howard and Fannie Mae's chief executive, Franklin D. Raines, have left a long trail of embittered opponents who have complained about high-handedness. "They are a study of power in Washington," said Andrew M. Cuomo, who sparred with Fannie Mae on housing issues as a former secretary of the Department of Housing and Urban Development. "Once the myth of invincibility is gone, the act crumbles."

Although Fannie Mae and its executives have not been shy in the past about taking on their critics, neither Mr. Howard nor Mr. Raines has been available for interviews about the regulatory review and investigations of the company. Both men are scheduled to testify on Wednesday before the House Financial Services Committee, and they will be thrust into the uncomfortable and unusual position of having to defend themselves and their actions.

"This has become a big-time game," said Bert Ely, a banking analyst in Alexandria, Va., and a longtime Fannie Mae critic. "It is one of the big power struggles under way right now. One of things that makes it that way is all the tumult and disturbing news, and issues that will not be resolved for months."


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FANNIE MAE is a behemoth in the mortgage business. It can borrow money more cheaply than its competitors in the mortgage business because investors, and lenders believe that there is an implicit guarantee that the government will offer financial support to Fannie Mae if the company ever swooned.

And the company's vast operations have helped keep mortgage rates low. Rather than lending money to prospective homeowners, Fannie Mae buys mortgages from banks that issue them, allowing lenders to make further mortgages. Fannie Mae's size, and its government backing, also allow home buyers in the United States to have mortgages with rates that are guaranteed for as long as 30 years, a financial benefit that is unavailable in most other countries, where banks typically recalculate mortgage rates monthly.

Mr. Raines has been Fannie Mae's chief executive and corporate ambassador since 1999. But Mr. Howard has a far longer tenure at the company and has overseen much of the machinery that has caused Fannie Mae's coffers to swell.

As chief financial officer since 1990, Mr. Howard has worked alongside three chief executives and three chief operating officers. During that time, Fannie Mae rebounded from a spate of financial turmoil to post earnings of $7.9 billion last year -- a 71 percent leap from $4.6 billion in 2002. Its loan losses have plunged over the last decade, and its mortgage portfolio has expanded to about $900 billion last year from about $200 billion in 1993.

The financial fortress that Fannie Mae has become is largely the handiwork of Mr. Howard and a highly skilled team of deputies who surround him. As C.F.O., Mr. Howard introduced new methods of managing the company's debt and overseeing its funds, including deploying high-octane financial tools known as derivatives that companies of every stripe use to insulate their operations from risks and unforeseen economic shocks. Mr. Howard's financial wizardry has won many admirers on Wall Street.

"In my experience, I would put him in the higher ranks of C.F.O.'s at financial companies," said Frederick N. Khedouri, a senior managing director at Bear Stearns, an investment bank that has extensive dealings with Fannie Mae. "Senior executives who know what the risks are and how to manage the risks are extraordinarily valuable and rare. Someone should think long and hard about who you would get who would be better at this than Tim."

For all of Mr. Howard's intellectual abilities, his diplomatic skills are described as lacking by current and former colleagues, financial analysts, Congressional aides and members of federal agencies that have worked with Fannie Mae. In that regard, he may be a mirror of Fannie Mae itself -- a well-oiled, highly calibrated machine that has also attracted an unusual amount of enmity for being high-handed in its dealings with outsiders.

When he joined Fannie Mae as chief economist in 1982, Mr. Howard was among a cadre of new hires brought in by David O. Maxwell, then the chief executive. High, volatile interest rates had brutalized the company and brought it to its knees. The national housing market was in a crisis, and there was a sense of public mission among the new hires -- that through the shrewd use of sophisticated financial tools and strategic thinking they would be able to resurrect the housing finance market.


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THAT missionary zeal still pervades Fannie Mae. Financial analysts say the company's executives regard themselves as stewards of the housing market who have to fend off critics who might otherwise disrupt its sensitive operations.

In 1987, Mr. Howard was promoted from chief economist to head of asset management, a position that allowed him to oversee the most profitable and complex area of Fannie Mae's business, its enormous mortgage portfolio. That job, said a former Fannie Mae employee, gave him "the keys to the kingdom."

Despite his monklike work habits, Mr. Howard is described by acquaintances as a family man, s a devoted father heavily involved in his children's activities. He owns an expensive home in the affluent Washington suburb of McLean, Va., where he hones his tennis game on his private court. He is also a patron of the arts and has been an active supporter of the Washington National Opera, where he serves as vice president and treasurer.

Within Fannie Mae, however, Mr. Howard has drawn a number of detractors. He is regarded as aloof, according to several people who have interacted with him at the company. They describe him as a sometimes unrelenting perfectionist, and someone who is unremitting in his oversight of his employees and their work -- occasionally, in his early years as C.F.O., dressing down employees in front of their peers.

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But others at the company say that he has grown into his job and that his management style softened, especially after he became vice chairman of Fannie Mae's board last year. "I worked with Tim for a number of years and know him to be a person of extraordinarily high integrity," said John Buckley, a former senior vice president at Fannie Mae.

Mr. Howard's assumption of his vice chairman's title last year brought him to the peak of his powers inside Fannie Mae. He became a member of a four-member office of the chairman, a role that gives him a voice in corporate strategy -- including the setting of Fannie Mae's earning goals. He has also grown close to Mr. Raines, and their second-floor offices are connected by a small conference room.

By late last year, Mr. Howard had assembled an impressive portfolio of duties at Fannie Mae, essentially having responsibility for overseeing how the company makes its money, how it counts its money and how it audits that count. When a little-known and underfinanced regulatory agency assigned to monitor Fannie Mae's operations came calling earlier this year with pointed questions about how things were being run, Mr. Howard was asked to describe his wide-ranging duties.

"Boy, how much time do we have?" Mr. Howard answered with a laugh, according to a recent report prepared by the regulatory agency, the Office of Federal Housing Enterprise Oversight, known as Ofheo.

In Washington's pecking order, Ofheo is low on the list, with a small staff and few resources. To critics, the fact that Fannie Mae is not overseen by a larger, more lushly funded regulator is a dangerous problem.


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"We've always maintained from the very beginning that there are important regulatory and safety and soundness issues there," said Beneva Schulte, a spokeswoman at FM Policy Focus, a Washington group that is funded by financial services companies and other groups and tracks Fannie Mae's operations. "There's no way they could keep meeting their earnings targets without going outside their charter into new lines of business or by being undercapitalized."

Ofheo's director, Armando Falcon Jr., began asking serious questions about Fannie Mae's accounting practices after critics said his agency failed to uncover accounting problems at Fannie Mae's sister agency, Freddie Mac. According to members of federal agencies and others who have interacted with Fannie Mae and Ofheo, Mr. Falcon bridled at Mr. Howard's and Mr. Raines's reluctance to provide his agency with timely, detailed and respectful replies to queries since he became Ofheo's director in 1999.

According to former Fannie Mae employees, Mr. Howard consolidated his power by guarding information and by rarely delegating authority. He adopted the same posture toward Ofheo, according to an individual close to Mr. Falcon.

The friction among Mr. Howard, Mr. Raines and Mr. Falcon became personal, said some who have witnessed their interactions. It was as if "Frank and Tim had questioned Armando's manhood," said a financier who knows all three men. An Ofheo spokeswoman acknowledged that there were problems between Fannie Mae and Ofheo but said her agency had maintained "an appropriate arm's-length relationship" with Fannie Mae.

Whatever the backdrop, the report on Fannie Mae released by Mr. Falcon's agency on Sept. 22 was caustic. In strong language unusual in a regulatory report, it cited numerous examples of accounting irregularities and managerial conflicts that Ofheo examiners contended were used to doctor Fannie's earnings and inflate executive compensation.

"If other companies used Fannie Mae's logic in applying accounting principles, they could dictate the financial results they desired, and there would be no comparability of financial results between reporting entities even within the same industry," the report said in one passage.

The brunt of the report's accusations are directed at Mr. Howard, who Ofheo examiners described as the engineer of suspect accounting machinations. The report accuses Mr. Howard of wearing so many different corporate hats that financial controls and auditing practices were potentially neutered at Fannie Mae. It also says Fannie Mae improperly disregarded accounting standards relating to loan originations and purchases as well as those related to derivatives used to hedge risk in its vast mortgage portfolio.

The report accuses Fannie Mae of creating a "cookie jar" reserve that Mr. Howard could dip into at his discretion to determine the amount of income or expenses the company chose to recognize in any given period. And the report cites other apparent machinations beginning in 1998 that helped bolster executive compensation at Fannie Mae.


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Analysts and financiers say a few of the accusations merit closer scrutiny while most others do not rise to the level of being improprieties -- much less crimes.

Jonathan E. Gray, a financial analyst at Sanford C. Bernstein & Company, said that while regulators might well have found important technical infractions of accounting rules, Mr. Falcon's motivations had to be considered. "You have a gentlemen that was told he is not strong enough who now is both the prosecutor and judge," he said. "The way to keep his job and keep his agency from being phased out was to be tough."

Nonetheless, Mr. Gray said that there could be a significant problem if Fannie Mae had a "cookie jar" reserve. But he dismissed most of the other criticisms in the report as immaterial. He said the accusation of problems with Fannie Mae's derivatives accounting might require more attention, but he and many others in the financial services industry said that the complex rules governing mortgage derivatives created enormous compliance and financial management headaches with which all C.F.O.'s were struggling.

The accounting maneuvers that the report says were used to fatten management's wallets do focus an uncomfortable spotlight on Fannie Mae's lush compensation practices. It also highlights the baronial ways of an organization funded in part by taxpayers and with a charter to help make housing available to low- and moderate-income Americans.

Mr. Raines earned about $20 million in total compensation last year, while Mr. Howard pulled in about $7.7 million. Since January, Mr. Howard has also sold Fannie Mae stock worth about $6.95 million. A Fannie Mae spokesman said that Mr. Howard's stock sales were all scheduled in accordance with a routine sales plan adopted and filed with the S.E.C. in February.

With Congressional scrutiny mounting, and the Justice Department investigation now at hand, both Mr. Raines and Mr. Howard have something at stake that is perhaps more precious to them than money: their reputations.

IN an unusual agreement with Ofheo reached last Friday, Fannie Mae said it would institute major changes in its accounting and management practices, including separating Mr. Howard's duties and instituting new auditing procedures. The company also agreed to add $5 billion in fresh funds to its capital reserve within the next nine months, a move apparently intended to shore up its finances in advance of any financial restatements.

That move, however, has not kept investigations from continuing. On Wednesday, Mr. Raines and Mr. Howard will have a chance to air their views before members of Congress. While the complicated nature of the allegations have circumscribed the executives' abilities to speak publicly about recent events, some analysts wonder why one of the most muscular players in Washington has largely fallen silent.

"People are shaking their heads, old-timers like me are shaking their heads, and saying, 'What kind of game is Fannie playing here?"' Mr. Ely said. "They have this circling-the-wagons mentality and are not giving anybody, including their investors, a sense of where this is going."

Eric Dash contributed reporting to this story.

Source : http://www.nytimes.com/2004/10/03/business/yourmoney/a-seismic-shift-under-the-house-of-fannie-mae.html

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