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

Federal News Service October 6, 2004 Wednesday

HEADLINE: PANEL II OF A 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)

WITNESS: FRANKLIN D. RAINES, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, FANNIE MAE; JIM HOWARD, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, FANNIE MAE

BODY:

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REP. LYNCH: Thank you, Mr. Chairman. Well, I don't have a bill on the floor, and I've got plenty of time, so if either of you gentlemen would like to expand on the previous yes-no answers in any respect, feel free to do so right now.

As someone who has grown up in public housing, I have a real investment in Fannie Mae's mission, and I see the good work that you do.

Let me just-you know, the previous speaker mentioned that she saw no bright lines in this OFHEO report. This is 200 pages. I just want to ask you again, just to be sure in my own mind: Did OFHEO sit down with you and interview you, Mr. Raines or Mr. Howard in preparation of this examination of your corporation of Fannie Mae?

MR. RAINES: They did not interview me.

MR. HOWARD: They did interview me on two occasions-one to discuss impairments on certain types of securities and one was a more general interview.

REP. LYNCH: Okay, and what about sitting down with your auditors about this report?

MR. RAINES: I do not believe that they've interviewed our auditors. But to be clear on your question, since they've done the-finished the report, they've not talked to us either about the content of the report.

REP. LYNCH: Well, it's not surprising then that there would be no bright lines in this, and that some of these accounting rules are fairly complex, and one would certainly understand how there might be differences of interpretation, as you've pointed out. In your own minds, as the CFO and CEO, is this a usual relationship with a regulator that they would go around you and not sit down extensively with you to try to bring you into compliance with a GAAP rule that they thought you were in noncompliance with?

MR. HOWARD: For me it is an usual relationship.

MR. RAINES: And I would-Congressman, I would agree that it is an unusual relationship. I did note in Director Falcon's testimony that he gave a reason why he felt the necessity to go around senior management. He said it was the lack of cooperation by senior management. If I could address that issue, I would --

REP. LYNCH: I'd like you to.

MR. RAINES: I would be delighted. We had our first meeting with OFHEO with regard to this special examination on January 7th. Since that date, we have produced 427,466 pages of documents, in 67 different document productions and 14 different requests, answering 425 questions. We also provided 966,367 pages of e-mails and e-mail attachments. We've even provided on three different occasions our own consultant to go to OFHEO to help OFHEO with their technology in managing their searching of our e-mail. We had 100 people working for four days to respond to just one of their e-mail request. We made Fannie Mae people available 47 times to be interviewed as part of this process.

Now, we provided to them the working papers of KPMG, and quite a bit of other information. I met with Director Falcon and told him or informed him that if there were any problems with Fannie Mae's cooperation in this examination, call me directly. And I've received no such call.

Now, the most inflammatory statement I guess is the one that says that the-that our cooperation was so bad that it required subpoenas to be issued, and then subsequently the Justice Department was called upon to perhaps enforce those subpoenas. First, with regard to the issuance of subpoenas, my attorneys were told by OFHEO's staff that the issuance of subpoenas was not related to a lack of cooperation, but that they were doing this simply to get people on the record. Secondly, with regard to the Justice Department, both in house an outside counsel for Fannie Mae spoke to the Justice Department about OFHEO's referral to it regarding enforcement of one subpoena relating to e-mail, and the Justice Department indicated that this was an issue that they expected to be worked out between OFHEO and Fannie Mae, without any involvement of the department or the courts.

So with regard to our cooperation, I think it's been overwhelming. The subpoenas, as we were told, had nothing to do with lack of cooperation, and the Justice Department has indicated that they believed that this was an issue that could and should be resolved between OFHEO and Fannie Mae, and it was resolved. All of the material requested by OFHEO has been provided to them.

REP. LYNCH: Thank you. And thank you for clearing that up. Is there anything else you want to add in terms of not a one-word answer, yes or no, but anything else that you feel that you need to clarify?

MR. RAINES: There's one other point I would like to make, and it's an issue that I think bears a broader discussion, and that is the notion that in corporations there should be silos, and that people should have one function, another function, and another function, and they should never have any of these brought together. In fact, the practice of corporations is to bring together these things at a high level. Mr. Howard is a vice chairman of Fannie Mae. He is one of the three most senior executives. So of course he has many people who report to him. Otherwise everybody would have to report to me, and that wouldn't be a very functional organization. So it is not unusual to have these reporting relationships. Indeed, there are many surveys that show that people bearing the CFO title quite often have risk management reporting to do, quite often have the balance sheet, the management reporting to them; quite often have internal auditors reporting to them. So although it's characterized as being unusual, it's actually usual. And in his role as the vice chairman, his duties are far beyond simply being CFO, and it is quite appropriate that he has a large part of the company reporting to him.

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

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