The regulator charged with overseeing mortgage concern Fannie Mae appears to be considering a shake-up of its top management to clean up the beleaguered firm.
Following a scathing report on Fannie Mae's accounting policies, internal controls and financial reporting processes, the head of the Office of Federal Housing Enterprise Oversight, Armando Falcon Jr., said in a letter to Fannie Mae's board that, "The findings raise such serious safety and soundness concerns that immediate action is warranted, rather than waiting until the completion of the full special examination."
"We must consider the accountability of management and whether we have sufficient confidence in management to fully implement these corrective measures and bring about broad cultural and operational changes in the areas of concern. The analysis and findings of this report make it difficult to assert such confidence," the letter continued.
Fannie Mae appeared to be preparing for a possible high-level shake-up by amending the employment contracts of its three top officers, according to a New York Times report that cited a Securities and Exchange Commission filing in which the company, at the request of the housing oversight agency, recently reached agreements with the three officers to deny them huge payouts if they are terminated for cause.
"I am prepared to work with you to resolve this matter in an orderly manner. However, you must realize I am prepared to act if the board does not," Falcon wrote.
In its report, released last week, the OFHEO said that the issues uncovered "raise doubts concerning the validity of previously reported financial results, the adequacy of regulatory capital, the quality of management supervision, and the overall safety and soundness of the enterprise."
"These findings cannot be explained as mere differences in interpretation of accounting principles, but clear instances in which management sought to misapply and ignore accounting principles for the purposes of meeting investment analyst expectations; reducing volatility in reported earnings; and enabling fragmented processes and systems, and an ineffective controls environment to exist," the Sept. 20 letter said.
The OFHEO said that Fannie Mae applied accounting methods and practices that don't comply with generally accepted accounting principles in accounting for the enterprise's derivatives transactions and hedging activities, employed an improper "cookie jar" reserve in accounting for amortization of deferred price adjustments under GAAP, tolerated related internal control deficiencies, and in at least one instance, deferred expenses apparently to achieve bonus compensation targets. In addition, the report said that Fannie Mae "maintained a corporate culture that emphasized stable earnings at the expense of accurate financial disclosures."
Falcon's letter also included what he said were the "minimum steps that need to be taken to address the safety and soundness problems" identified. Among those steps are corrective actions related to accounting policies and practices, capital adequacy, internal controls, segregation of duties, and further reviews.
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