Citizens Against Government Waste (CAGW) today named Fannie Mae its 2004 Corporate Turkey of the Year in recognition of how it has cooked the books in its growing accounting and corporate governance scandal. Fannie Mae is a government-sponsored enterprise (GSE), mashed together by Congress and endowed with tens of billions of dollars worth of special privileges and exemptions. Fannie Mae has been under scrutiny over the last several years because its securities enjoy the implied backing of the taxpayer, yet Fannie Mae (like its corporate cousin Freddie Mac) is exempt from many of the regulatory and accountability rules other major financial companies must comply with.
“Fannie Mae has used its special taxpayer-backed privileges and exemptions to leverage itself into a massive mortgage empire with virtually no outside supervision or accountability,” CAGW President Tom Schatz said. “Now, it appears the company is showing the feathers we associate with Enron and Worldcom, putting taxpayers at enormous risk in order to receive huge executive bonuses and artificially inflate its stock price. It is unconscionable that Congress has stood by and allowed Fannie’s corporate executives to game the system for personal gain, especially in one of the most vital and sensitive sectors of our economy, housing.” ...
In September, Fannie Mae’s regulator at the Department of Housing and Urban Development stated that Fannie Mae had engaged in “cookie jar” accounting in order to present gravy earnings to its investors, improperly accounted for its hedging transactions, and manipulated its accounting rules in order to trigger compensation bonuses for its top executives. Fannie Mae may now have to carve down its earnings by $9 billion. Fannie Mae, which had been operating under a voluntary disclosure agreement with the Securities and Exchange Commission, missed its deadline for filing its third-quarter earnings report because its accounting firm, KPMG, refused to certify the statement. (Link)
Fannie Mae is a disaster waiting to happen. The trouble is that it is neither fish nor fowl. Fannie Mae's government connections insulate it from discipline by markets and investors. Worse yet, the markets believe (with some justification) that the federal government has (implicitly) guaranteed fannie Mae's debts, which allows it to also avoid by market discipline by borrowing at below-market rates. Moreover, because the board includes political appointees, it is further insulated from investor discipline. The solution is privatization. Let it run as a for-profit corporation in a competitive market, with full disclosure. If it is not privatized, however, increased regulatory scrutiny will be essential. (See an excellent paper by two economists entitled Competition for Fannie Mae and Freddie Mac.)
Update: Paul at Dog Eared Town has more, with examples of what looks like at least misfeasance.
