Fannie Mae woes rooted deep in culture

WASHINGTON — When James Johnson walked out of his office as chief executive at Fannie Mae for the last time, in December 1998, the longtime Democratic Party operative could look back at his nearly decadelong tenure at the helm knowing that the company had lived up to his promises of double-digit earnings growth.

The value of its assets had also tripled, and its share price had risen sevenfold.

"Without good numbers, nothing else can get done," he said in 1998.

Good numbers kept Wall Street happy.

They paid the light bills for more than 50 partnership offices that represented Fannie Mae around the country. And they made top executives multimillionaires. Johnson received $21 million in his last year as chief executive and a consulting contract worth $600,000 a year.

But when good numbers — and the bonuses that came with them — weren't possible anymore, the executives who came after Johnson allegedly rearranged the math and, even after accounting problems were found, used the company's political clout to fend off closer regulation.

That was the conclusion of Fannie Mae's chief regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), in a 340-page report released last week that determined the company's $10.6 billion accounting scandal was rooted in a corporate culture that dates back 20 years.

Johnson, now a managing partner with Perseus, a private equity firm and merchant bank, has not been accused of involvement in the accounting irregularities.

During the 1990s, he shaped the company's management and culture, mixing a Wall Street-like obsession with meeting earnings targets and the aggressive tactics of a political campaign.

Held in "high regard"

In an interview this past week, Johnson would not discuss what happened after his tenure and said Fannie Mae's political success was a result of its success in funding home mortgages.

"The regard with which we were held was what defined our political success," he said. "If we were not held in that high regard, it wouldn't have mattered what else we did. ... I didn't know a company that had a better reputation than Fannie Mae."

Johnson's vision for the company was rooted in its unusual structure as a shareholder-owned, publicly traded company with a government charter to promote homeownership.

To fulfill its mission, it buys home loans from banks and other lenders, replenishing the supply of mortgage money, and pooling the loans into securities for sale to investors.

With its charter comes certain advantages, such as a line of credit with the Treasury Department and exemption from federal, state and local income tax. As a result, the company is perceived as having the backing of the federal government, allowing it to borrow money at close to government rates and to pass those savings on to lenders and eventually to customers.

By the time Johnson took the reins in 1991, protecting its charter had become management's "pre-eminent concern," said former president and chief operating officer Roger Birk, who served on the board in the early 1990s.

To keep up with Wall Street expectations, the company began holding on to more mortgages and mortgage-backed securities for investment purposes.

Its smaller rival, Freddie Mac, copied the strategy. Around the time Freddie Mac's accounting scandal broke in 2003, the companies' combined portfolios totaled $1.5 trillion.

Greenspan concerned

Then-Federal Reserve Chairman Alan Greenspan and others came to fear that a sudden meltdown at one of the two companies could bring down the financial markets with it — an argument that Johnson and his successor, Seattle native Franklin Raines, fought at every opportunity. They assured investors and policymakers that no such thing could happen because the company was so well managed.

Only after Fannie's regulator, OFHEO, uncovered accounting problems did it become clear that Fannie Mae hadn't adequately invested in internal controls. The report said political power helped stave off closer scrutiny.

Because of the scandal, Raines retired in 2004. In a statement, Raines says he holds himself responsible for the accounting violations but did not know about them.