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WASHINGTON – As far as the housing government sponsored enterprises are concerned, 2004 began and continued throughout the year pretty much the way 2003 ended – with Freddie Mac and Fannie Mae both being closely investigated by congressional committees and federal agencies for possible accounting misconduct. In January, Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight which regulates the GSEs, testified at a hearing before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises and presented the findings of the agency’s Report on the Special Examination of Freddie Mac. At the time it was issued, the report was one of the latest developments stemming from the announcement made by Freddie Mac in mid-2003 of a shakeup of its executive leadership in the wake of three years’ worth of financial results by about $4.5 billion and allegations surrounding accounting errors and failures. In his testimony before the congressional Subcommittee, Falcon told the members that, “Until remediation efforts have taken full effect, Freddie Mac remains exposed to substantial management and operations risk.” The situation continued to mount. In April, the Senate Banking Committee marked up legislation drafted by Committee Chairman Sen. Richard Shelby (R-Ala.) and ranking member Sen. Paul Sarbanes (D-Md.) that would create a new regulator for all housing-related GSEs and place Freddie Mac, Fannie Mae and the Federal Home Loan Banks under one agency that would replace the OFHEO and the Federal Housing Finance Board. Their bill was similar to a measure – H.R. 2575 – introduced in July 2003 by Rep. Richard Baker (R-La.), chairman of the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises that would abolish the OFHEO and create a new government regulator for the GSEs. Baker wanted the regulation moved to the Treasury. In September it was Fannie Mae’s turn to be the subject of OFHEO’s investigative attention after the regulatory agency found accounting irregularities with that GSE. The alleged accounting problems also prompted an inquiry by the Securities and Exchange Commission. On Sept. 20, the OFHEO sent a report to Fannie Mae’s board that found earnings manipulation, lax internal controls and a corporate culture OFHEO states “emphasized stable earnings at the expense of accurate financial disclosures.” By October, the Fannie Mae investigation heated up as Rep. Baker held a hearing on the OFHEO report, Allegations of Accounting and Management Failure at Fannie Mae. Among the findings of that report, the OFHEO 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.” Later the same month, the Securities and Exchange Commission opened its own formal inquiry of Fannie Mae into its accounting irregularities. Fannie Mae issued a statement that it intends to “fully cooperate with the SEC’s ongoing investigation.” One month later, however, Fannie Mae notified the SEC that it would not be able to meet a regulatory deadline of Nov. 15 to file its third-quarter financial results. -

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