The Federal National Mortgage Association -- better known as Fannie Mae and the largest buyer of US mortgages -- said on Wednesday that it would reduce its earnings by US$6.3 billion to correct several years of accounting problems in one of the nation's biggest financial scandals.
Federal regulators, meanwhile, said they planned to file a lawsuit before the end of the year in an effort to recover millions of dollars from Fannie Mae's former top two executives, whose bonuses were tied to the manipulated earnings. Franklin Raines, the former chairman and chief executive, and J. Timothy Howard, who had been chief financial officer, were ousted from the company in December 2004 and investigators have laid much of the blame on their shoulders.
"We will file charges within the next couple of weeks," James Lockhart, director of the Office of Housing and Enterprise Oversight, said in a brief interview on Wednesday. "Unfortunately, the legal process is very cumbersome."
A lawyer for Raines declined to comment, and a lawyer for Howard did not return phone calls on Wednesday. A Fannie Mae spokesman also declined to comment.
The two moves are significant steps in the effort to clean up Fannie Mae a company whose influence once reverberated through the corridors of Washington and Wall Street. Over the last two years, however, the company has been mired in the scandal.
Federal investigators have searched through the company's records, leading the Securities and Exchange Commission (SEC) and the Office of Housing and Enterprise Oversight (OFHEO), to exact a US$400 million civil penalty in May. Members of Congress have jousted over the need for a more powerful regulator and to limit the size of its mortgage portfolio, although a bill may not be passed until at least early in the new year.
"We continue to move ahead," Daniel Mudd, who replaced Raines as Fannie's chief executive, said in a statement.
In a filing with the SEC late on Wednesday, Fannie said that errors related to the way it accounted for complex derivatives resulted in a US$7.9 billion loss after taxes -- or US$2.9 billion less than what the company had previously estimated.
But the company said it misstated earnings by US$6.3 billion when it worked through the financial statements from 2001 through the first two quarters of 2004, the last time it filed official results.
Fannie Mae is still updating its financial statements from after then -- a process that Wall Street analysts and its regulator anticipate could take at least a year more.
The restatement is among the biggest for a US company, although it falls short of the US$11 billion correction taken by WorldCom when it wiped out its phony profits.
Lockhart said that Fannie was "making great progress."
"They are putting a lot of hard work on getting the numbers out, but they show significant errors and do not even agree with their estimates," he said.
But analysts said the actual numbers were less important than the message they sent.
"It gives investors some confidence they are getting their act together from a financial perspective," said Robert Napoli, an analyst with Piper Jaffray.
The OFHEO may be facing a more difficult task than Fannie Mae as it prepares to try to recoup the many millions of dollars Raines and Howard received as a result of the improper accounting.
Regulators have said that of the US$90 million paid to Raines from 1998 to 2003, at least US$52 million was tied to bonus targets that were reached by manipulative accounting practices.
The OFHEO is already trying to recover several million dollars in compensation from the former chief executive of a smaller government-connected lender, Freddie Mac, which was involved in similar accounting improprieties. That case has been in legal gridlock for nearly three years.
"We are making progress, but it is taking very long," Lockhart said on Wednesday.
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