Fannie Mae will pay $400 million to put an end to the accounting woes that have dogged the home mortgage giant since 2004.The latest estimates from government-chartered Fannie Mae, whose official name is the Federal National Mortgage Association, are that the company expects to reduce net income by upwards of $11 billion in financial restatements for fiscal years spanning 1998 to 2004.

The Office of Federal Housing Enterprise Oversight and the Securities and Exchange Commission jointly announced the settlement, which coincided with the release of a 340-page report from OFHEO that blamed Fannie Mae's board and management for a corporate culture that allowed managers to use bad accounting to manage earnings and trigger bonuses.

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

In a statement, Fannie Mae president and chief executive Daniel Mudd said that the company is happy to resolve the matter. "We have all learned some powerful lessons here about getting things right and about hubris and humility," he said. "We are a much different company than before."

For the six years through 2003, the report said, $52 million of the $90 million of compensation for former chief executive officer Franklin D. Raines was directly tied to meeting targets for earnings per share. Raines and former chief financial officer Timothy Howard were forced out in December 2004, when regulators confirmed that Fannie had violated accounting rules.

The full OFHEO report, which is the result of a three-year investigation, is available at The report also pointed to Fannie Mae's board of directors for failing to exercise its oversight responsibilities. In late May, Fannie Mae said that it would replace the chairman of its audit committee, Thomas Gerrit, with accounting professor and former Financial Accounting Standards Board chair Dennis Beresford.

"Strong accounting controls, though a recognized cost center, can significantly help detect and deter violations of the federal securities laws," said SEC associate director of enforcement Paul R. Berger, in a statement. "Fannie Mae failed to devote sufficient resources to its accounting. ... Public companies should learn from this lesson and ensure that their internal controls and accounting practices are, at a minimum, sufficient to meet their compliance obligations."

The SEC's investigation is continuing, and the Justice Department has been pursuing a separate criminal investigation.

The report is expected to spur on legislation that would limit the portfolios of both Fannie Mae and its smaller mortgage competitor, Freddie Mac. OFHEO fined Freddie Mac a record $125 million in 2003 for misstating earnings by $5 billion - mostly underreporting them. The holdings of the two companies currently total about $1.4 trillion.

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