Hearing of the Capital Markets Subcommittee of the House Committee on Financial Services - The OFHEO Report

Federal News Service October 6, 2004 Wednesday

HEADLINE: HEARING OF THE CAPITAL MARKETS SUBCOMMITTEE OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES SUBJECT: THE OFHEO REPORT: ALLEGATIONS OF ACCOUNTING AND MANAGEMENT FAILURE AT FANNIE MAE

CHAIRED BY: REPRESENTATIVE RICHARD H. BAKER (R-LA)

PANEL 1 WITNESS: ARMANDO FALCON, JR., DIRECTOR OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

BODY:

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REP. LYNCH: Thank you, Mr. Chairman. I want to be brief.

The one thing I don't want to forget is the good things that Fannie Mae is doing, and I hear Enron talked about here this morning, this is not Enron. This is not the Enron situation. These are clearly violations of accounting principles, but let's not go overboard and make this a criminal proceeding. And I'm very interested in hearing exactly what the differences in the accounting practices, and how we can correct them. But this should not be a witch hunt, this should not be a political exercise in punishing people who have done a lot of good things in this country providing housing opportunities for a lot of people that need them. But, clearly, we've got to get our house in order here.

Thank you, Mr. Chairman.

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REP. STEPHEN LYNCH (D-MA): Thank you, Mr. Chairman. And I was late in the hearing, but I do want to thank you for coming here today and helping the committee with its work. And I know you've had a rough time with some of my colleagues, but I don't think there's anybody here that questions your-your good intentions to help us with this process, and that's the position I take. You-you are-you're good to do your work, and we need you to do it really well, and I'm sure that's going to happen. However, this is the political side of the table, and some of us up here are going to twist and use your-your information to help us grind and axe with Fannie Mae or others, or to defend it, as I will intend to do. But that's not to discount the good work that you're doing.

I do want to rebut a couple of things, and I want you to work with me here. I've heard Enron, Enron, Enron about, you know, a bunch of times here, and quite frankly, the chairman of the subcommittee did a wonderful job in helping the committee with its work on that case, but even-even the chairman of the full committee has brought that specter to bear in comparing what has happened at Fannie Mae to Enron. And I just want to ask you, I mean, we have the Enron situation. We had a house of cards there, a financial house of cards where there was no strength to the underlying business. They had a very unsound business model. We had serious problems in the underlying business. Is that what you see here? Is that what you see here?

MR. FALCON: No, the business model of the company remains sound.

REP. LYNCH: Remains sound.

MR. FALCON: What --

REP. LYNCH: Thank you. I don't-I don't have much time, so I'm going to have to-that's just one thing I wanted to get out there.

We had 19 criminal indictments. We had 96 criminal charges. We had 78 fraud counts against the people who were running Enron. Is that what we have here, or is it more in the line of, you know, noncompliance with accounting standards?

MR. FALCON: I-we've referred any opinions, resolutions of any criminal conduct to the Justice Department, and we've referred the corporate fraud-to the corporate fraud task force our report, and we are cooperating, giving information to the U.S. attorney about, on their request, about anything we found and documents that we have about this. But beyond that, we are not forming judgments about the criminality in this, and we have not made any criminal referrals to the Justice Department.

REP. LYNCH: Thank you. And-and in terms of the gross manipulation that occurred in the California power market by Enron, in which investors and employees lost their pensions and their life savings, is that-is that what we're looking at here or is it-is it something different?

MR. FALCON: I think until the entire review is over, I withhold maybe broad categorical statements about this. Certainly what we've found to date raises serious concerns with us about the company's proper accounting as well as their internal controls, doubts about safety and soundness, prior financial statements. If we find that this type of conduct shows up in other areas that we have yet to begin to review, then it would become much more serious than even it is now.

REP. LYNCH: So, you're saying they could be defrauding the public and the investors and the employees just like Enron? Is that what you're saying --

MR. FALCON: No --

REP. LYNCH: -- that this could be one of those cases?

MR. FALCON: -- I don't know. I have no evidence --

REP. LYNCH: You just said there was a sound business model here.

MR. FALCON: Exactly-a sound economic business model. But as far as any criminal intent or any desire to break laws for some criminal purpose, I don't know. I can't speak to that.

REP. LYNCH: Okay. Thank you. Thank you, Mr. Chairman.

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