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WASHINGTON – The Fannie Mae scandal doesn’t show any signs of going away any time soon, even though the secondary mortgage giant promised to cooperate with regulators in their investigation of the company’s alleged accounting mismanagement and earnings manipulation. In fact just the opposite seems to be happening. One week after the Office of Federal Housing Enterprise Oversight which regulates the housing Government Sponsored Enterprises, released its findings of a special examination of Fannie Mae’s accounting policies and practices for over a year and found earnings manipulation, lax internal controls and a corporate culture “that emphasized stable earnings at the expense of accurate financial disclosures,” the Justice Department announced it had begun a criminal investigation of the OFHEO’s report findings. The Securities and Exchange Commission is conducting its own inquiry into Fannie Mae’s accounting practices. On Oct. 6, Rep. Richard Baker (R-La.), chairman of the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, held a hearing on “the OFHEO (The Office of Federal Housing Enterprise Oversight) Report: Allegations of Accounting and Management Failure at Fannie Mae.” In July 2003, Baker – a long-time critic of Fannie Mae and Freddie Mac – introduced H.R. 2575, the Secondary Mortgage Market Enterprises Regulatory Improvements Act, to strengthen the regulation of the two housing GSEs. Baker’s bill would abolish the OFHEO and create a new government regulator for the GSEs. Baker had pushed for the regulation to be moved to the Treasury. The list of witnesses called to appear to testify at the Oct. 6th hearing included: Armando Falcon, director, OFHEO who was the first witness; and from Fannie Mae Chairman and CEO Franklin Raines; Tim Howard, executive vice president and chief financial officer; and Ann McLaughlin Korologos, presiding director, Board of Directors. This made the second time this year that Falcon was called to testify at a Subcommittee hearing. In January he testified at a special examination of Freddie Mac on that housing Government-Sponsored Enterprise’s accounting irregularities. The hearing also marked Raines’ first public appearance on the allegations since news of the scandal first came to light in September. Prior to the hearing, Baker requested Falcon provide him with copies of all documents and records “related to the actions of Tim Howard and Roger Barnes.” A former Fannie Mae employee, Barnes worked as a manager in the company’s controller’s office and assisted federal regulators in their investigation of Fannie Mae. He did not personally testify at the congressional hearing, however according to The Washington Post, Barnes’ attorney said his client would submit written testimony at the hearing. Barnes allegedly raised concerns about Fannie Mae’s accounting practices. But in its “Report of Findings to Date: Special Examination of Fannie Mae” released by OFHEO’s Office of Compliance on Sept. 17, the agency stated that “the Special Examination found that Mr. Barnes’ allegations were substantive, and that the Office of Auditing failed to adequately investigate the problems surrounding the amortization process that he raised.” Among the findings of OFHEO’s report, it concluded that “the accounting used by Fannie Mae for amortizing purchase premiums and discounts on securities and loans as well as amortizing other deferred charges is not in accordance with GAAP.the amortization policies that management developed and the methods they applied created a `cookie jar’ reserve.” The report described Howard as being “the chief architect of Fannie Mae’s amortization policy.” In a copy of his testimony remarks prepared for delivery, Howard stated that since joining Fannie Mae in 1982, “All of my judgments regarding accounting issues were made in openness and good faith, with the goal of providing investors with the most meaningful and understandable information possible.I also made certain that any accounting approaches we adopted were reviewed with our outside auditor.” The Fannie Mae executive further stated that, “At all times I believed that the accounting applications we adopted were within the boundaries defined by GAAP, as interpreted and understood by our accounting experts both inside and outside the company.” Howard made it clear that Fannie Mae filed financial statements with the SEC “that were fully audited by (independent auditor) KPMG and Fannie Mae has not withdrawn those financial statements and KPMG has not withdrawn its opinion that those financial statements were prepared consistent with GAAP in all material respects.” In concluding, Howard emphasized that, “It is important to note that the matters to be reviewed relate to accounting judgments and not issues of risk management.” In Raines’ prepared remarks for testimony, the Fannie Mae Chairman and CEO began by stating that, “Some people have mistakenly concluded that the company’s agreement with OFHEO constituted an admission by the company to the findings and conclusions of the report. Let me clarify that is not the case. The agreement itself states that the Company was not admitting or denying any wrongdoing as a result of signing the agreement.” He also informed the Subcommittee that the Fannie Mae Board’s independent review committee has hired the law firm of Paul, Weiss, Rifkind, Wharton & Garrison to conduct an independent investigation, led by former Senator Warren Rudman, of the allegations contained in the OFHEO’s special examination report. Raines also addressed the charge in the report that Fannie Mae “willfully violated GAAP in order to maximize executive bonuses.” “This is a serious allegation, and we strongly disagree with it,” Raines stated. But in Falcon’s testimony, the OFHEO official stated that the report findings have implications in four areas of concern to the agency: 1. “the validity of Fannie Mae’s previously reported financial results”; 2. “the adequacy of its regulatory capital”; 3. “the quality of senior management’s supervision of the Enterprise”; and 4 “Fannie Mae’s overall safety and soundness”. -

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