Fannie Mae bonuses come under scrutiny

WASHINGTON — Based on reported earnings it must now correct, Fannie Mae paid $65.1 million in bonuses to employees in 2003, according to one of the federally chartered company's congressional overseers.

The bonuses, pegged to annual earnings targets set by the Fannie Mae board, were distributed to a group of 749 members of management, according to data released Wednesday by Rep. Richard Baker, R-La., chairman of the House capital-markets subcommittee. That was more than double the $27.1 million in bonuses awarded to a group of 547 participants in 1998.

The 2003 bonuses averaged $86,953 per participant, up from an average $49,533 in 1998.

Regulators have accused the company of manipulating earnings, and Fannie has estimated it may have to record $9 billion of losses kept off its income statements since the beginning of 2001, when a key accounting rule took effect.

The bonuses are "extremely relevant to the question of fixing a corporate culture so focused on short-term success that it appears to have created the wrong type of incentives that may have played a part in the manipulation of earnings," Baker said in a news release.

The accounting problems led last month to the ouster of Seattle native Franklin Raines as Fannie's chairman and chief executive and J. Timothy Howard as its chief financial officer.

"Excessive payments"

In a Jan. 14 letter to Baker, Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight (OFHEO), said his office "will take all actions appropriate to recapture excessive bonus payments, in addition to other amounts, that OFHEO finds were based upon false or misleading financial information or are otherwise excessive."

The letter was referring to executive incentives, and the agency's posture toward bonuses for other management employees was not clear. OFHEO spokeswoman Stefanie Mullin did not return calls.

In the letter, Falcon cited "a number of supervisory tools" his agency could use to halt payments to ousted executives at Fannie Mae and its smaller rival Freddie Mac. Officials for OFHEO, Fannie's primary regulator, have declined repeated requests to describe those tools in detail.

Government and private-sector lawyers familiar with the regulators' efforts to force Freddie Mac to halt payments to two former top executives say those powers are far from clear.

Ousted Freddie Chief Executive Leland Brendsel and Chief Financial Officer Vaughn Clarke successfully sued OFHEO in U.S. District Court last year to block the agency from ordering Freddie to freeze their severance packages. The judge ruled OFHEO could not block or recover payments until it had completed administrative-law proceedings, in which it would have to lay out the reasons it sought such an action and give Brendsel and Clarke a chance to respond.

Freddie Mac challenged

In the parallel administrative proceedings, which began in late 2003, the agency seeks to reverse Freddie Mac's decision to allow Brendsel to retire and Clarke to resign after a Freddie accounting scandal. OFHEO argues that Freddie instead should fire the two retroactively, which would deprive them of millions of dollars of compensation.

At the same time, OFHEO is using the administrative proceeding to try to recover money directly from Brendsel and Clarke, arguing the two failed to perform their jobs. Lawyers for the two men would not comment.

The administrative proceedings against Freddie Mac, Brendsel and Clarke will take at least two years to resolve and will chart new territory for the agency, which has never before taken such action.

The powers of other federal regulators are clearer and stronger. Bank regulators at the Treasury Department, the Federal Reserve Board and the Federal Deposit Insurance Corp. (FDIC) must give their permission before a troubled institution they regulate can pay severance money to departing executives, whether they were ousted or left voluntarily, officials said.

"There is no question but that the statutory enforcement powers given OFHEO with respect to Fannie Mae and Freddie Mac pale when compared to the explicit enforcement powers given the federal banking agencies under the banking laws," said Raymond Natter, former deputy chief counsel for the Treasury Department's Office of the Comptroller of the Currency, which regulates national banks.