Fannie Mae duo rebuked

WASHINGTON — An extensive investigation of embattled Fannie Mae points to its former finance chief and controller as mainly responsible for the accounting failures at the mortgage giant now struggling to emerge from an $11 billion scandal, said a report released Thursday.

The report by a team of investigators led by former Sen. Warren Rudman of New Hampshire also found that former chairman and CEO Franklin Raines, while not sharing direct responsibility, contributed to a culture of arrogance at the government-sponsored company.

The report comes about 17 months after the revelation that federal regulators had discovered violations of accounting rules and earnings manipulation by the company to meet Wall Street targets.

The board of Fannie Mae, which finances one of every five home-mortgage loans in the United States, hired Rudman as independent counsel to launch an investigation at the time of the stunning disclosures in September 2004.

Fannie Mae executives — especially former chief financial officer Timothy Howard — gave the board incomplete and sometimes misleading information regarding the company's accounting and finances, the report found. Howard and longtime CEO Raines were ousted by the board in December 2004.

The report also concluded that Howard and former controller Leanne Spencer, who resigned last year, "were primarily responsible" for the flawed accounting practices in their overzealous drive to have the company show smooth earnings growth and meet Wall Street analysts' expectations.

The highly critical September 2004 report by the regulators also singled out Howard, saying he "failed to provide adequate oversight" — a charge he has denied.

As for Raines, who was one of the most influential and politically savvy figures in Washington, the Rudman investigation did not find that he knew that Fannie Mae's accounting practices violated rules.

"We did find, however, that Raines contributed to a culture that improperly stressed stable earnings growth and that . . . he was ultimately responsible for the failures that occurred on his watch," the report says.

A 1998 instance in which Fannie Mae was said to have improperly put off accounting for $200 million in expenses to future periods so top executives could collect $27 million in bonuses — previously made public — was affirmed by Rudman's inquiry. Documents cited in the report show top-level management was focused in 1998 on the $200 million "catch-up" and meeting earnings targets that would trigger the payment of full bonuses.