Federal News Service - Hearing of the Capital Markets Subcommittee of the House Committee on Financial Services...

Federal News Service October 6, 2004 Wednesday

HEADLINE: HEARING OF THE CAPITAL MARKETS SUBCOMMITTEE OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES SUBJECT: THE OFHEO REPORT: ALLEGATIONS OF ACCOUNTING AND MANAGEMENT FAILURE AT FANNIE MAE

CHAIRED BY: REPRESENTATIVE RICHARD H. BAKER (R-LA)

PANEL 1 WITNESS: ARMANDO FALCON, JR., DIRECTOR OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

LOCATION: 2128 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

BODY:
REP. BAKER: (Sounds gavel.) I'd like to call this meeting of the Capital Markets Subcommittee to order. The Capital Markets Subcommittee meets today for the purpose of receipt of a report from the Office of Federal Housing Enterprise Oversight. It is indeed a very troubling report, but is a report of extraordinary importance not only to those who wish to own a home, but as to the taxpayers of this country who would pay the cost of the clean-up of an enterprise failure. Although not intended to fuel the effort to bring about regulatory reform, the analysis makes clear that more resources must be brought to bear to ensure the high standards of conduct are not only required but, more importantly, they are actually met. For the record, I am not pleased and certainly not happy about these revelations. I am saddened by the disclosures. In all my years of inquiry in this matter, I was only in pursuit of appropriate oversight. Never did I question whether the GSEs were professionally managed to the highest standards of business conduct. Now I do. The culture of mismanagement described in the report must be eliminated and assurances gained that the highest standards of conduct will be consistently practiced. I know there will be those who will still cling to the belief that the issues raised are minor, or that opinions may differ on technical accounting standards. Some may still think this is all a plot by the big banks to preserve market share.

The content of the report, in my view, cannot be legitimately questioned. Utilizing the firm of Deloitte and Touche and the staff of OFHEO, the director's report is delivered after review of over 200,000 documents and e-mails, as well as hundreds of interviews and depositions of current and former Fannie Mae staff.

The statement made on the first page of the executive summary unfortunately sums up our circumstance: "The matters detailed in this report are serious, and raise concerns regarding the validity of previously reported financial results. The adequacy of regulatory capital, the quality of managerial supervision and the overall safety and soundness of the enterprise." This finding, in my judgment, makes committee action essential.

For the record, I should also note that the resistance the GSEs have expressed toward enhanced housing goals. In light of these revelations, their opposition now makes more sense than ever. Should the proposals considered by this committee to focus clearly on the needs of first-time home-buyers actually become law, the enterprises would have to allocate resources to those goals at the expense of reduced earnings. A reduction in earnings would reduce the likelihood of paying out bonuses to executives.

The same observation holds true as to the regulators' decision to increase capital and Fannie's strong objections to such a requirement. We all know the enterprise is thinly capitalized, but the potential effect of requiring a responsible capital level would adversely affect earnings per share, and consequently affect the bonus payments to executives.

I also wish to inform members of the committee of another troubling incident which I now choose to make public. About a year ago I corresponded with the director's office, making inquiry about the levels of executive compensation at the enterprise for the top 20 executives. This information had not previously been made public. In a matter of days, Fannie Mae had engaged in services of Mr. Ken Starr, legal counsel. For the purpose of informing my staff and committee counsel of the potential consequences of making that information public, it was made clear that civil legal action would be filed-I presume against me-if the information were to be released. At the time, I made the decision not to release the data, since there was no clear relevance to the reform effort underway-not out of concern for any litigation that might be filed.

The realization that this disclosure that the information was so sensitive to the enterprise never really fully impacted me until I read the director's report. Now I understand why the enterprise was anxious not to have public disclosure of compensation, ironically of an entity created by the Congress and supported by the taxpayer. Circumstances have now changed. As a direct result of the abhorrent accounting practices, executives have been able to award themselves bonuses I do not believe they earned and I do not believe they deserve. For that reason alone, disclosure of where the money went is highly appropriate.

At the conclusion of this hearing, I will release the compensation information obtained from OFHEO, and further am forwarding an additional letter to the director requesting that all compensation information for both enterprises be provided to the committee for a period covering 10 years for all executives that shared in any bonus distribution. This is now essential in that OFHEO has indicated that accounting manipulation has impacted the financials on more than one occasion, therefore placing the payment of bonuses in question. I find this very troublesome business. Much is at stake. The ability of this committee and this Congress to act will be called into question. Notwithstanding the ultimate outcome, the facts will remain and our duty will never be more clear.

Mr. Kanjorski.

(BREAK IN TRANSCRIPT)

REP. LUCAS: Mr. Chairman, I look forward to hearing from the witnesses.