🚗 🚙 Turn your trusty old car into trustworthy journalism Learn more

$400 million fine slapped on Fannie Mae

Kai Ryssdal May 23, 2006

KAI RYSSDAL: It’s kind of an unfortunate name for such an important company: Fannie Mae. It buys up our mortgages. Packages them to sell to other people. Huge player in the U.S. housing market. Big . . . and maybe a little arrogant, too. Dishonest, even. We learned today Fannie will pay $400 million to settle up with regulators. . . .

We’ve known for a good long while that everything’s not on the up and up at Fannie Mae. The company has restated earnings. Done internal investigations. And booted its top executives. But today the really bad news hit. A report by Fannie’s federal regulator painted an ugly picture. Said the company had been massaging its books. Smoothing out the rough spots to hit its earnings targets. And keep investors happy. James Hagerty covers Fannie Mae for the Wall Street Journal. I asked him whether Fannie Mae really needed to be cooking the books.

JAMES HAGERTY: No, I don’t think so. It may have helped Fannie Mae to borrow money slightly more cheaply than otherwise. But I think that accounting manipulations were not necessary to the company’s business model.

RYSSDAL: No company. Not even the best-run one out there that we can think of . . . Nobody hits earnings to the penny year after year after year. Don’t you think that perhaps somebody should have been a bit more suspicious a bit earlier?

HAGERTY: Yes. And the report makes very clear that that responsibility was one that the board of directors should have taken up. It is striking that the report shows a chart over five or six years of the go-over earnings and the exact level of reported earnings, and they are exactly the same each year. That would not normally happen if things were left to chance.

RYSSDAL: The fine is $400 million. Is it a fine, actually, or is there some sort of settlement under which nobody’s going to be prosecuted any farther?

HAGERTY: It is a fine of $400 million. It does not guarantee that nobody will be prosecuted. This is a settlement between the company itself and the regulators. The Justice Department is believed to be still investigating, so there could be further legal action down the road.

RYSSDAL: One of the things the Treasury Department said this morning after this report came out was that it is urging Congress to put some limits on the size of Fannie Mae and how important it can be in the housing market. Do you think that is now going to come to pass?

HAGERTY: Not necessarily. Congress has been arguing about this for the past couple of years. And there is a real split over exactly how growth might be limited. The House passed a bill that would leave the regulator very wide discretion but would not require him to shrink the size of the companies. The White House, on the other hand, and the Treasury want very tough limits that would really force Fannie Mae and Freddie Mac, its sister company, to drastically slim down. They would become much different companies.

RYSSDAL: Any net impact, do you think, on the US housing market?

HAGERTY: Well that’s the whole problem for Congress. I think a lot of people in Congress find these issues hard to understand — as any normal human being would — and are worried if they cause too many changes, that could upset the housing market, which is already looking a bit fragile. And no politician wants to be blamed for reducing the value of your home.

RYSSDAL: James R. Hagerty is a reporter for the Wall Street Journal. Mr. Hagerty, thanks for your time.

HAGERTY: Thank you.

RYSSDAL: Wall Street liked the tough talk about Fannie Mae. Shares in the company picked up about a percent today.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.