More Troubles for Fannie Mae and Freddie Mac

The Federal takeover of Fannie Mae and Freddie Mac has not put an end to the woes of these two companies. The two companies have now received subpoenas from federal prosecutors in New York seeking information on the companies’ accounting, disclosure, and corporate governance. The two companies have also received requests from the Securities and Exchange Commission that they preserve documents.

The investigation focuses on activities starting in 2007. The bookkeeping practices of the two companies have always been questioned by critics. In fact, a Fortune magazine story said new accounting procedures at Fannie Mae masked potential losses on bad loans.

Accounting irregularities are nothing new to Fannie Mae and Freddie Mac. Both have had to restate earnings in past years following discoveries by federal regulators of irregularities on the companies’ books. Few years back, both companies were forced to restate billions of dollars in earnings after federal regulators discovered accounting irregularities at both companies. The scandal led to the replacement of the companies’ top executives. Freddie’s former chief executive, Gregory Parseghian, was ousted in December 2003. Fannie Mae CEO Franklin Raines and Chief Financial Officer Timothy Howard were swept out of office a year later.

Fannie Mae has also paid a record $400 million to the SEC in 2006 to settle charges that senior executives fraudulently used “cookie jar” reserves and other accounting gimmicks to hide $10.3 billion in losses from 2002 to 2004 to maximize bonuses.

Freddie Mac paid $125 million in fines in 2003, while earnings between 2000 and 2002 were restated after it discovered derivative-related errors after replacing one of its former auditors, Arthur Andersen. At the time, regulators charged that the company manipulated its accounting to push about $5 billion in earnings to future quarters.

The two companies have been in the conservatorship of their regulator, the Federal Housing Agency, since the government seized them. There is increasing pressure on the administration to hold accountable the companies and top executives. Both companies have said that they will cooperate fully with the prosecutors. The Federal Housing Finance Agency, which controls the companies, said that it will work with the companies to assure a smooth and efficient process and will work with the government agencies as they undertake their inquiries.

The Federal Bureau of Investigation is already looking at potential fraud by these two companies and insurer American International Group, Inc. The inquiries will focus on the financial institutions and the individuals who ran them. A number of members of Congress, including several on the Senate Judiciary Committee, have urged the FBI to be more aggressive in pursuing possible criminal charges against major players in the crisis. If the top executives of these companies were cooking the books, manipulating, doing things they were not supposed to do, then every American taxpayer would want them held responsible.

2 comments to More Troubles for Fannie Mae and Freddie Mac

  • Hope Obama government find solution…

  • Ruby2sday

    Investigate Raines, Schumer, Frank, Dodd, Pelosi and Obama for their roles in the FM/FM collapse NOW! Republicans should be screaming for this! Obama is getting nationwide support from people who mistakently believe the Democrats will save us from financial ruin, when in fact they are the ones with their foot on the accelerator as the economy teeters on the edge of a financial precipice! An Obama/Pelosi administration will bankrupt us!

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