A culture of deceit at Fannie Mae's top

WASHINGTON — Senior executives at Fannie Mae manipulated accounting to collect millions of dollars in undeserved bonuses and to deceive investors, a federal report charged Tuesday. The government-sponsored mortgage company was fined $400 million.

The blistering report by the Office of Federal Housing Enterprise Oversight, the result of an extensive three-year investigation, was issued as Fannie Mae struggled to emerge from an $11 billion accounting scandal. Also Tuesday, the housing oversight agency and the Securities and Exchange Commission announced a $400 million civil penalty against Fannie Mae in a settlement over the alleged accounting manipulation.

Of that amount, the $350 million assessed by the SEC — one of the largest penalties ever in an accounting fraud case — will go to compensate Fannie Mae investors damaged by the alleged violations.

The company also agreed to limit the growth of its multibillion-dollar mortgage holdings, capping them at $727 billion, and to make top-to-bottom changes in its corporate culture, accounting procedures and ways of managing risk. Thirty executives and employees at the company as well as others who have left — including Daniel Mudd, the current president and CEO — will be reviewed for possible disciplinary action or termination.

Washington-based Fannie Mae neither admitted nor denied wrongdoing under the settlement but did agree to refrain from future violations of securities laws.

"The image of Fannie Mae as one of the lowest-risk and 'best in class' institutions was a facade," James B. Lockhart, the acting director of OFHEO, said in a statement as the report was released. "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."

The report also faulted Fannie Mae's board of directors for failing to discover "a wide variety of unsafe and unsound practices" at the largest buyer and guarantor of home mortgages in the country.

The OFHEO review, involving nearly 8 million pages of documents, details what the agency calls an arrogant and unethical corporate culture. From 1998 to mid-2004, the smooth growth in profits and precisely-hit earnings targets each quarter reported by Fannie Mae were "illusions" deliberately created by senior management using faulty accounting, the report says.

The Bush administration has been pushing for legislation to reduce the massive mortgage portfolios of Fannie Mae and its smaller government-sponsored sibling, Freddie Mac.