folying Soweity and Theory Section 151 150 Us The Buro Statale Sociability and Sustainabi reports consistent with their Federal Pension Benefit Guaranty Corporation. The audit estimates the sbortfall in total private pension plan funding at $450 villion. The Federal Pension Benefit Guarantee Corporation deficit from paying pensions is now $23.5 billion With that level of shortfall and media attention, massive reforms came with the passage of the Pension Protection Act of 2006, The pattern in the regulatory cycle is always the same. Someone finds a loophole in the lans, and those in the industry take advantage of that loophole as a strategy for maximizing their returns. History repeats itself when it comes to the regulatory cycle. For example, prior to the savings and loan crisis and collapse of the late 1980s and early 1990s, appraisers were not regulated. The qualifications for an appraiser were limited, and issues such as conflicts of interest (where the appraiserstood to benefit in a transaction if the land value came in at an appropriate level) were not controlled in an area in which there are few legal guidelines, leway translates into licentiousness and then abuses that often graduate into fraud. The firms begin by crossing these ethical lines of conflicts of interest or by only asking whether something can be done (such as the pension funding and reporting issues) and not whether it should be done. Those ethical violations, centering on basic values such as fairness in real estate transac- tions or honoring the pension commitment made to employee Case emotional reactions and outrage. Courts and/or legislatures step in to legislate thick What is perhaps so difficult for executives to grasp about the regulatory cycle is that it moves not by data or logic but rather by emotion and by public perception. Public perception changes through examples and anecdotes The US, tax deductibility limits on CFO pay, as ill-defined and designed as they were resulted from public emotion and outcry over executive compensation. There are contine ing demands for reforms. Stock option grants are a gently percolating issue to watch as continuing attention and outrage build Presently companies are grappling with the expensive and intense mandates of Sarbanes-Odey (SOX) regulations. The statutorily imposed mandines on board structure, conflicts, financial reporting, and certification of processes and reports have found many firms with delayed Alings and restatements Still, one of the benefits of anticipating issues in the latency stage is that a company is then prepared for implementation and may enjoy a period of competitive advantage because it is not distracted by complex regulations and their implementation. Their prac tices found them in compliance before the law and regulatory mandates existed. Some firms have taken SOX in strade and found that its provisions even provide them with some efficiencies How to Seize the Moment and Manage the Cycle There are businesses that do slae the latency moment. There is little question that the clec tri utility Industry would look a great deal different today if it had not handled the issue of EMF (electromagnetic fields) as effectively and openly as it did As we look back over the art of financial reporting, we see a host of ethical issues that went on unmanaged until SOX as passed and mandated. The audit firms themselves are now fully regulated for their complicity in the frauds at World.Com, Enron. Adelphia, and others. The federal government must withoise them to conduct audits, and the role of the accounting profession in setting ethical standards has been usurped by the government- federal laws now determine what constitutes a conflict of interest on the part of an audi tor because the profession had not defined a conflict broadly enough to cover the clearly conflicting interests auditors had with their clients. Officers are now required to pay back bonuses carned because of inflated earnings reports. Ethically there was no other anner but that the company be repaid those bonuses, but too few executives saw the me, and SOX requires that the officers restore their bonus payments to the company if the numbers have been inflated How can a director who is not independent be an effective member of the beard audit or compensation committee? The conflict is overwhelming, and even the disclosure of a director dual role does not cure the conflict. The result of too many abuses of conflicting relationships by too many directors is that federal law now requires independent directors only on the audit and compensation committees of board. How could the issue have evolved to the point of federal mandates? It got to the point because there were ethical breaches, and the result was a wild ride in terms of both compensation and inaccurate financial reports. When the degree of abuses unfolded, the public became emotional and demanded action. That action came in the form of strict requirements for board structure There are ethical issues that are now in the latency stage-that stage where the publicis not aware of a problem and no one is filing sultor demanding regulation. What follows is a list of questions to help anticipate the cycle What is the topic of droussion in the industry • What conceiro domics and then pressing about the predict, its production and tele? • Is the company tengon alcohol in the • Has it disclosed that loophole is in • It has not disclosed the loophole, were the company's masons for keeping it close to the vert • Are the consactions for er do they put someone is • restors in the industry doing the same thing Discussion Questions 1. Nare some issues that you have seen aansing own cars. Once Uber took a local requires moving through they began her position of feestructure 2. How should a business respond with public and other laws on this ideat Udond emotionally charged about its practices its pred tar transportation that would cost anabo utts, Creations? For me, the internal Imo vandens rution Service company. Utet began its business as Uber customer complaints and safety outside the regulatory radar. This was not acab began to How should be headed the SVR to sing ruired. This was tota cycle was opening Imousine service the drivers used the Case 3.14 Fannie, Freddie, Wall Street, Main Street, and the Subprime Mortgage Market: Of Moral Hazards Background on Fannie Mae Fannie Mae was created as a different sort of business entity, a shareholder owned corpora tion with a federal charter. The federal government created Fannie Mae in 1938 during the Roosevelt administration, to increase affordable housing availability and to attract invest ment into the housing market. The charge to Fannie Mae was to be sure that there was a stable mortgage market with consistent availability of mortgage funds for consumers to purchase homes. Initially, Fannie Mae was federally funded, but in 1968 it was rechartered as a shareholder-owned corporation with the responsibility of obtaining all of its capital The invention of 250 companies for acting interiors 152 Une Three Business Scholders, Selespettand Sustainly Azlying Socially and State Theory Section 153 from the private market, not the federal government Onits website, Fannie Mae describes its commitment and mission as follow • Expand conteneownership for home buyers and here the minoti home-consiste with the ultimate goal of closing the honouns antrek • Meloni ar rental housing for families risk of losing their homes • Exsand the polyet atal housing where is needed most, which include its for workforce ing and potihoing for the chronically honderd Trastom tarted communities, including tannual and Native American, by channeling all the company's tools and resources and signing efforts will pass in these areas Simultaneously, the federal government anticipated pushback from lenders who would point out that there were high-risk loans and required greater returns. However, lenders were evaluated for their CRA commitment, which included their creativity in granting the loans. In addition, lenders faced prosecution by the Justice Department for discrimination in lending If their loan portfolios did not include a sufficient number of CRA loans. All the while, Fannie Mae served as the purchaser for these loans, eventually packaging them and selling them as securitized mortgage pools. The CRA loans had borrowers with less equity, higher default rules, and more foreclosures. There was also an exacerbating effect of this false sense of security on the part of the high-risk borrowers about their mortgages Because these risky borrowers were not really anteling up the actual cost of their homes (and remember, there were folks who had never had a mortgage before, had bad credit histories, and may not have had much in the way of financial literacy), they overextended and overspent in other areas. In short, they were maxed out in all areas because they were Bulled into a false sense of financial security with such a low mortgage payment. Because Tannie Mae owned or guaranteed half of the $12 trillion mortgage debt in the United States, any problems with those mortgages could and did lead to a financial crisis for Fannie, the U.S. stock market, and the economy. Then-Federal Reserve Chairman Alan Greenspan warned of the looming problems at Panne Mae in 2005. He testified before Congress, The Federal Reserve Board has been unable to find any credible purpose for the huge balance sheets built by Fannie and Freddie other than profit. Others, including St. Louis Federal Reserve Chairman William Poole, warned that the huge debt load rendered Fannie and Freddie Insolvent A Model Corporate Citizen In 2001, Business Ethics magazine named Fannie Mae the most ethical company in the United States. It had been in the top 10 corporate citizens for several years (number nine in 2000 and number three in 2001 and 2002). Marjorie Kelly, the editor-in-chief of the magazine (see Reading 3.6), described the standards for the award, which was created in 1996, as follows: Just what does it mean to be a pod corporated to our minds masingly strong ami of the wall. And the women who wear in the form because they have risked for a human and wide capital in the corporation, or because they are impected by its activities. While lists of stakeholders can be long, we focus on tour groupes Motors and the community Being a good manding to the impact on the groups In 2001, the magazine explained why Fannie Mae was one of the country's top corporate citizens Fami Moore Night in the man of community and stand has held at the top of everyone "best" list, including Fortune's Best Companies for Mini Working Mother's Best Companies for Work ing Mothers, and the American Benactor's "Americas Most Geners Comparis Franklin D. Rain, an African Amer, CEO, and there are two went and two mismong the company's shiline In 2002, Business Ethics described third ranked Pannie Mae as follows: The purpose of Fannie Mora private come with an unusual charter is to spread home ownership anong Antrians. Its S2 trilion program American Drean Commitment-wins to increase fonte was formas, winning and those in tow.come communities In 2001, ver of Fernie Mo's financing went to low and motomoto. A great deal of worsenes pagations that are under and typically and were shown that it's an inminently able ponad Bant Zigor vice president informie Mas National Community Lending Contacts goal topening to inpandorrowers and the lower the cos "That represents a string on to other financial many of which reporter than help low.in commes to aid the victims of practory lenders, Farnie Malows online in underwriting news for per tapped in abuse ans, if they could have initially qualified for conventional trong Jauty the company committed 31 milion to purchasing the type of The Community Reinvestment Act (CRA) is a federal statute that established a govern ment program to get people who would otherwise not qualify (e, no credit history and no down payment) into homes with the goals of helping these folks and thereby revitalizing blighted areas. Banks and lenders were evaluated for their commitment to these loans, and no bank or lender wanted a bad rating The Darker Side of Corporate Citizen Fannie Even as the mortgage rues were evolving under the radar and Fannie was being recog. nized for its corporate citizenship there were issues in Fannie's operations that went unde- tected for nearly a decade. Fannie Mae: The Super Achiever with an EPS Goal Fannie Mae was a company driven to carnings targets through a compensation system tied to those results. And Pannie Mae had a phenomenal run based on those incentives in terms of its financial performance . For more than a decade, Paris More achieved content, double-dit growth in samings . In that some decade, Farnie Mat's mortgage portfolio grew by five times to SS billion • Fron 2001 2004. its profits totaled 24 bit • Though 2006 Farnie Mae's soms were trading at over 80. Forni eslo to smoothcoming through decisions on the recording of interest costs and und gues tionable discretion in ditomining the counting tratant for buying and selling is norage These decisions allowed mecutives at the company to smoothcomings growth with a resulting garanteed payouts them under the incentive plans utel "Langed by Wahington Ford de Bond New York Times July 2011 d. 18 mest, Hagerty & D. McKinnon, Fannie Mee Board Agrees to Changes tongflested. Wel Sree! Juma, 2004. AL Hid Alex Bergman, AW WIHaces to view York Times December 17,2004. al Dwyer, Arrows, Mac Howanesan, "Fannie WeDamage?" Fortune, October 11, 2001, erstenfeldeal Housing Enterprise Oversight IOFEO report, November 15, 2005, report found at http://www.na gowDefauk pel Page 4. Accedy 20, 2010. The OPHEO marged to the Federal France Housing Agency in 2000 flowing Fannie Muscle 2003, Fannie Mauer 13, Bath Apr 2000 Ethio Mesure 2000 in the Mey/June 2001 whics Melo Ashing Social Responsibil and Stole Theory Section 155 154 Unit Three Best St. Secil blond startit Those Incentive plans were based on earnings per share (EPS) targets that had to be reached in order for the officers to earn their annual bonuses. The incentive plans besan in 1995, with a kick-up in 1998 as Franklin Ralnes, then-chairman and CEO, set a goal of doubling the company's EPs from $3.23 to 5646 In five years." Raines, the former budget director for the Clinton administration, was able to make the EPS goal a part of Fannie Mas culture. Mr. Raines said, "The future is so bright that I am willing to set a goal that our EPS will double over the next five years. Sampath Rajappa, Fannie Mac senior vice president of operations risk (akin to the Office of Auditing), gave the following pep talk to his team in 2000, as the EPS goals continued By now everyone el you the branded in your brains. You must be able say it in your son you must be able to cite towards and backward, you must hanging fire in your belly fat burns may all doubts you must brothe and ham 8.46, you must be sad 646...Alter all thanks to Frank, walim of money iting on it. We must do this with a determination, not on see, et on est day buly and day out, give it your best, et 50% 75% 100%, but 1506. Penember from the given to nity to em not just our salaries benefits, but stillver and above 548 So it is our moral obligation to give well over 60% and if we do this, we would have made tongblecer butions toward Fans goes For 1998, the size of the annual bonus payout pool was linked to specific US targets . Camings per ser range for an incentive plen Alpe goal $312.minut, 18 target payout $121, maput." For Fannie Mae to pay out the maximum amount in Incentives in 1998. EPS would have to come in at $3.23. EPS were below the $3.13 minimum, there would be no Incentive payout. The 1998 EPS was $3.2309. The maximum payout goal was metas the OFHBO report noted right down to the penny. The final OFHEO report concluded that the exec utive team at Fannie Mae determined what number it needed to get to the maximum EPS level and then worked backward to achieve that result. One series of e-mails finds the exec utives agreeing on what number they were comfortable with as using for the volatility adjustment The following table shows the difference between salary(what would have been paid if the minimum target were not met) and the award under the annual incentive plan (AIP) "Right down to the penny" was not a serendipitous achievement. For example, Fannie Mae's gains and losses on risky derivatives were kept off the books by treating them as hedges, a decision that was made without determining whether such treatment qualified under the accounting rules for exemptions from earnings statements. These losses were eventually brought back into earnings with a multibillion impact when these types of improprieties were uncovered in 2005.10 Fannie Mae and Volatility Tannie Mae's policies on amortization, a critical accounting area for a company buying and holding mortgage loans, were developed by the chief financial officer (CFO) with no input from the company's controller annie Maes amortization policies were not in compliance with GAAP (generally accepted accounting principles). The amortization policies relied on a computer model that would shorten the amortization of the life of a loan in order to peak earnings performance with higher yields. Fascinatingly, the amortization policies were developed because of a mantra within the company of no more surprises. The philosophy was that in order to attract funding for the mortgage market, there needed to be stability that would attractivestors. The officers at the company reasoned that "volatility was a barrier to accomplishing its goals of a stable and available source of mortgage funds for homes. When the computer model was developed, the officers reasoned that they were simply adjusting for what was arbitrary volatility. However, arbitrary volatility turned out to be a difficult to grasp concept for those outside Fannie Marther, the volatility measures and adjustments appeared to have a direct correlation with the EPS goals that resulted in the awards to the officers. Even those within Fannie Mae struggled to explain to investigators what was really happening with their adjustments. In the OFHEO report, an investigator asked lanet Pennewell, Fannie Mod's vice president of resource and planning, "What is arbitrary volatility in earnings?" Ms. Tennew. ell responded Arbitrary volatility in our view, weirdd we can give you an example of what would come in our View, arbitrary volatility. If your constantlyield was dramatically different between leur and the next carta acel an arbitrary decision you had ar view changing your view of long-term interest that caused a dramatic change in the constant to yield that you were reporting you could therefore beina post by what your sumtion about our interest rate wal And to us that was by position where you might be booking 310 milion of income in one quarter and 200 million of expense in the next volatility because it wally because of your vitw, your expectation of interest and the way the you were more your prenum and discount constant effective it, you would introduce something into your financial states that in tryllective of low you really at the to promoverit Birected and was not presentative of the fundamental facial performance of the company The operative words to us appeared to have fueled accounting decisions. But there was an overriding problem with Fannie Mae's reliance on arbitrary volatility. Fannie Mae had fixed rate mortgages in its portfolio Market fluctuations on interest rates were inrele vant for most of its portfolio 1998 Salary and Bonus of Senior Fannie Moe Executives Officer Title Salary James A Johnson Chairman and CEO $966.000 Franklin D. Raines Chairman and CEO designate $526,154 Lawrence M. Smal President and COO $783.839 Jamie Dorock Vice chairman $395.000 Timothy Howard Executive vice president (EVP) 5567.000 CFO Robert J. Levin EVP housing and community $395.000 development AIP Award/Bonus 51.932.000 $1,109,589 51,108,259 5493,750 5779625 $493,750 Fannie Mors Purchase Pumun and Discount Amortization Polo's policies on accounting and finan cal reporting on to a poldid not comply with GANTOWO. The report wasiwedbany 2001 news or hered conditions beyond what per interim report Greg fanello New Problems in port on Foo, USA Today, February 21, 20% p. 1 OWO porta hary Mean Tholofuni Me Fortuny 25, 2006.12 Oflice of Federal Housing Enter Oversigt OEOL Final Report the pain of May 2006 Who con terred to OFMED Record OH Ofico Compliance Report of findings to Dute Special in Form September 12 2004 Thington, DC OPHOLD , 18 der erred to as HEO opor OFEO Hot OFEO Report This portion of the discusiowe from Maring had the Mongo. No pole Security: The Real Fring before Being Fred upon and Not Being Socied Shocked That Fraud Gong Wah 2 Asting Social Periblity and Stakeholder Theory Section 157 156 Unik Three Busineskehede Social Respons, and by Fannie Mae's Accounting The accounting practices of Fannle Mae were so agressive that when Raines, lawyers, and others met with the SC to discuss the agency's demand for a restatement in 2005, the SEC told Raines that Fannie's financial reports were inaccurate in material respects." When pressed for specifics, Donald Nicolaisen, head of the SEC's accounting division, held up a plece of paper that represented the four corner of what was permissible under GAAP and told Raines, "You weren't even on the page. The OFHEO report on Fannie Maes accounting practice paints an ugly picture of a company tottering under the weight of haleful misdeeds that have marked the corporate scandals of the past three years dishonest accounting, lax internal controls, insuficient capital and me first managers who only care that earnings are high enough to get fat bonuses and stock options. *** When Franklin Raines and Fannie Mae CFOL Timothy Howard were removed by the board at the end of 2005, Daniel H. Mudd, the former COO during the time frame in which the accounting issues arose, was appointed CEO. When congressional hearings were held following the OFHEO report, Mudd testified that he was as shocked as anyone about the accounting scandals at the company at which he had served as a senior officer. He added, "I was shocked and stunned when Senator Chuck Hagel confronted Mudd with "Im astounded that you would stay with this institution." There were other issues that exacerbated the accounting decisions at Fannie Mar. Me How and, as CFO, had two functions to set the targets for annie's financial performance and make the calls on the financial reports that determined whether those targets (and hence his incen tive pay and bonuses) would be met. In effect, the function of targets and determination of how to meet those targets rested with one officer in the company. The internal control struc ture at Pannie Mae was weak even by the most lax internal control standards In 1998, when Fannie Mae CEO Raines set the EPS goals, the charge spread throughout the company, and the OFHEO report concluded that the result was a culture that improp. erly stressed stable earnings growth. Also in 1998, Armando Falcone of the OFHEO issued a warning report that challenged Fannie Mae's accounting and stunning lack of internal controls. The report was burled until the 2004 report, readily dismissed by Fannie Mae executives and members of Congress who were enamored of Funnie's financial perfor mance, as the work of "pencil brains who did not understand a model that was working, The Unraveling of the Fannie Mae Mystique Employees within Fannie Mae did begin to raise questions. In November 2003, a full year before Pannie Mae's issues would become public, Roger Barnes, then an employee in the Controller's Office at the company left Fannie Mae because of his frustration with the lack of response from the Office of Auditing at Fannie. He had provided a detailed concern about the company's accounting policy that internal audit did not investigate in an appropriate manner. No one at Fannie Mae took any steps to investigate Barness warnings about the flaws in the computer models for amortization. Worse, in one instance, Mr. Barnes notified the head of the Office of Auditing that at least one on-top adjustment had been made in order to make Fannie's results meet those that had been forecasted. At the time Barnes raised his concern, Fannie Mae had an Ethics and Compliance Office, but it was housed within the company's litigation division and was headed by a lawyer whose primary responsibility was defending the company against allegations and suits by employees When those in charge of the Office of Auditing (Mr. Rajoppa, of EPS 6.46 pep talk fame, was the person who handled the allegations and investigation) investigated Barnes's allegations they were not given access to the necessary information and the investigation was dropped. Many of the officers at Fannie disclosed in interviews that they were aware of the Barnes allegation of an intentional act related to financial reporting, but none of them followed up on the ince or required an investigation Barnes was correct but wa ignored, and he left Fannie Mae. He would later be vindicated by the OFHEO report, but the report was not issued until after he had left Fannie Mae Fannie Mae settled with Barnes before any sult for wrongful termination was filed. In 2002, at about the same time Barnes was raising his concerns internally, the Wall Street Journal began raising questions about Fannie Maes accounting practices. Those concerns were reported and editorialized in that newspaper for two years. No action was taken, however, until the OFEHO interim report was released The final OPHEO report noted that Fannie Mae's then CEO Daniel Mudd listened in 2003 as employees expressed concerns about the company's accounting policies. However, Mr. Mudd took no steps to follow up on either the questions or concerns that the employees had raised in the meeting that also subsequently turned out to accurately reflect the financial reporting missteps and misdeeds at Fanale Ma. The special report done for Hannie Mack board indicates that the Legal Department at Fannie Mae was aware of the Barnes allegations, but it deferred to internal audit for making any decisions about the merits of the allegations, The investigation of then-New York Attorney General Eliot Spitzer (Mr. Spitzer became governor in 2007 and resigned in 2008 because of a sex scandal) into insurance companies added an aside to the Fannie Mae scandal and revealed yet another red flag from a Fannie Mae employee. In 2002, Fannie Mae bought a finite-risk policy from Radian Insurance to shift S40 million in income from 2003 to 2004. Radian booked the transaction as a loan, but Fannie called it an insurance policy on its books. In a January 9, 2002, e-mail, Las Hoyes, Fannie Mae's chief for residential mortgages, wrote about the Radian deal. "I would like to express an extremely strong no vote.... Should we be exposing Fannie Mac to this type of political risk to move' 540 million of income? I believe not." No further action was taken on the question raised the deal went through as planned, and the income shifted to another year. 'The Fallen 1213 SchablonChalluned to Made New York Times, December 23, 2004, A1 Did S. H&Shin Set Gili Mehel Wishington Post, June 16, 2006.02 Gordon Me En Questioning from Sensor, USA Today 2014 OPHOnder Report 15 d. p.78 W. Huwere the Omen valence in the food is the Barres legation ped, Weird, et. A Report to the Special Review Committee of the Board of Direction Form February 23, 2006. Sonnaber referred to a Board Report Seni Political Risk," Wall Street Journal, September 30, 2006, p. 10. Eric Dr Regulators Denounce Furni "Mew York Times, May 24, 2005, p.C1. Mr. Madd said. " I wish I had handed differently." an, .- Board Report 2 Down Kapel. Loos the Farnie Had Some Help. Busness Week, June 12, 2006, p. 330. Radian's general con had comment on the del "We have not done anything improper rilegal in this per Case or in any other case" od to get that kind of a wide sath from general course che Lawton Rial Reports Big Landes. For 34,206, OCLC PROFEO Inport Alying Social Resity and Stoholder Theory Section 159 158 UnitThree Business Sales Social Responsibility and Sustant The Fallout at Fannie Mae Fannie Mae paid a $125 million fine to OFHEO for its accounting improprieties. As part of that settlement. Pannie Mal board agreed to new officers, new systems of internal control and the presence of outside consultants to monitor the company's progress. The agency concluded that it would take years for Fannie Mae to work through all of the accounting issues and corrective actions needed to prevent similar accounting missteps in the future. Yannie Mae settled charges of accounting issues with the SEC for $400 million Investigations into the role of third parties and their relationships to Fannie Mac and actions and inactions with them are pending Former head of the SEC Harvey Pitt commented, "When a company has engaged in wrongful conduct, the inquiry inevitably turns to who knew about it, who could have prevented it, who facilitated to The head of the OFHBO, upon release of the Fannie Mae report said of the company's operations, "More than any other case I've seen, it's all there." When he was serving as the CEO of Fannie Mae as well as the chair of the Business Roundtable, Franklin Raines testified before Congress in March 2002 in favor of passage of Sarbanes-Oxley. The following are excerpts from his testimony, which began with a reference to the tone at the top: The cutes of the American repressten obtains from the merger of morate responsibility with individual responsibility and The Business Roundtable belastesportit starts at the top We understand why the American people are stand outraged by the tailure of plastiind gourmance at Enon. It is wel esport and inacceptable for corporate leaders to say they did het in or get it was not their duty to robout the operations and activities of their company, particularly when it comes to risks that the fundamental ability of the company First, the paramount duty of the board of directors of public corporation is to select and verses competent and ethical management to the company or a day to day basis Second. It is the posibility of management to prove the company in a competent and calmer Senior magnetist to now how they com its income and what is the company is undertaking in the course of carrying out ts business Management should never put personal interests ahead of or in collie with the interests of the conger The final Fannie Mae report was issued in May 2006 with no new surprises or altered conclusions beyond what cal statement questions and issues with, among other things, a $6.3 Million restatement of revenue for the period from 1998 through 2004. Mr. Raines earned 590 million in bonuses for this period. The report also concluded that management bad created an unethical and arrogant culture with bonus targets that were achieved through the use of cookiejar reserves that manipulated earnings." OFHEO filed 101 civil charges against Mr.Ralnes, former Fannie Mae CFO Timothy Howard, and former Controller Leanne G. Spencer. The suits asked for the return of $115 million in incentive plan payouts to the three. The suit also asked for $100 million in penalties daard word CEO FC USA Today, October 6, 2011, nie Moe Oh My Take Your New York Times. June 16, 206, p. Bar, Fanie May S4 Mio Fine." USA Today, May 2010 ged, and some Dayton & Hove Mor What's the Damage 45, 46 Semant by Rane Cham, Corporate Governance Too of the Roundub, bare the US House Commercial Senior Wagton, DCMarch 20, 202 Thamel,"No New Problems in Report on Fri, 16 OVED, Heart of Pedings to Due Special to offer tomber 11, 2001, www.ohe gecewed 19.2010 ruha Muebles Sandby U.S. Norm December 2004, se CC The three settled the case by agreeing to pay $31.4 million Mr. Raines issued the following statement when the case was settled: "While I long ago accepted managerial accountability for any errors committed by subordinates while I was CEO, it is a very different matter to suggest that I was legally culpable in any way. I was not. This settlement is not an acknowledgment of wrongdoing on my part, because I did not break any laws or rules while leading Fannie Mae. At most, this is an agreement to disagree." The Evolving Financial Meltdown and the Conflicts Once the restatement was completed, Fannie Mae returned to increasing its mortgage portfolio, But Fannie also built relationships. Through its foundation, the Fannie Mae Foundation, Fannie (subsequently investigated by the IRS for violating the use of a charitable foundation for political purposes) made donations to charities on the basis of the political contacts they were able to list on their applications for funding, Bruce Marku, the CEO of Neighborhood Assistance Corporation, a recipient of Fannie Foundation funds explained. Many institutions rely on Fannie Mae and understand that those funds are contingent on public support for its policies. Pannie Mae has intimidated virtually all of them into remaining silent." Donations went to those groups that supported CRA including the annual fundraisers for several congressional groups. In exchange, when regulatory or legislative action was pending that was unfavorable to Fannie, those members of Congress would come out in support of Fannle, what one member of Congress called, "a gorilla that has outgrown its cage. When the SEC wanted to push to have Fannie Mae register its securities as other companies did, at least six members of Congress wrote letters of support for Fannie and the SEC backed down from its demand. Fannie's board members also stood to benefit from continuing Fannie's growth and mortgage policies Lenders, seeking to curry favor with Fannie in having it purchase their mortgages offered special loan terms to Fannie executives and board members as well as to members of Congress. The following chart lists those loans that were given by Countrywide under a special program that was nicknamed, "FOA," for "Friends of Angelo." Angelo Mozilo was the CEO of Countrywide, a company that collapsed under the weight of its subprime mortgages, nearly all of which were purchased by Fannie Mae. Amount $982,253 5985,340 Rate 5.125% 4.125% Years 10 10 $960,149 5.00% 10 FOAs at Countrywide Nama/Thule Franklin Haines Former CEO Fannie Mae Jamie Gorlick Vice Chair Fannie Mae James Johnson Former CEO Fannie Mae Daniel Mode COO/CEO Farnie Mae $971,650 3.875% 3 $265.000 4.2503 7 Rani MwSt u. 21. 2001. A ww Kopecki Philatorie Meeskril 2, 2007. 36 Crawl, "long Protected by givind Fred Blood' AJ Gio "The Man Ww Sul 22 2001 p. A1?