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Federal News Service - Panel II of a Hearing of the Capital Markets Subcommittee of the House Committee on Financial Services - Transcript

By:
Date:
Location: Washington, DC


Federal News Service October 6, 2004 Wednesday

SECTION: PRESS CONFERENCE OR SPEECH

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

LOCATION: 2128 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

BODY:

REP. BAKER: At this time, I would like to ask our second panel participants to come forward when it's possible.

At this time, the committee welcomes our next witnesses, Mr. Franklin D. Raines, Chairman and Chief Executive Officer of Fannie Mae; and Mr. Timothy Howard, Vice Chairman and Chief Financial Officer of Fannie Mae.

(BREAK IN TRANSCRIPT)

REP. BACA: Thank you very much, Mr. Chairman. Let me ask this question of Mr. Raines or Mr. Howard, and either one of you can respond. OFHEO has been the regulator since 1992, is that correct? That's 12 years. During those 12 years, their responsibility is not only to audit you, is that correct?

MR. RAINES: They examine us. They have an annual examination.

REP. BACA: And during that examination, if they find any deficiencies, is it their responsibility to let you know of any deficiencies, methodologies or others that you're following, that you should be following, that you should not be following? Is that correct?

MR. RAINES: Yes, that would be their responsibility.

REP. BACA: In this particular case, did they ever come back and tell you in terms of standards, practices or procedures or the deficiencies that you had to talk to each-either one of you two?

MR. RAINES: With regard to these issues?

REP. BACA: Yes.

MR. RAINES: Not until we saw the special examination report.

REP. BACA: Isn't that a normal practice for any accounting firm or auditing firm to basically sit down with the CEO or the chairman to discuss any deficiencies or procedures or processes that they're not following? Is that normal standard?

MR. RAINES: It's a standard, and we did sit down with them each year. In fact, their chief examiner met with our board and presented the results of their exam, and none of these issues were included in any of those exams over any of those years.

REP. BACA: And in any of those years, did they ever sign off in terms of your methodology or procedures or methods that you used?

MR. HOWARD: Well, you might want to talk about the FAS 133 exam. From what I can recall, when we implemented the process for FAS 133, along with the systems, OFHEO did do a review of those qualification systems and said that it met or exceeded safety and soundness standards.

REP. BACA: That meant that they had to have signed off, right? That said that you are following directions, and they didn't come back and tell you that you needed to follow a different one, or the methodology that you're using is now different? Is that correct?

MR. HOWARD: I wouldn't know how to characterize it. They would have to do the characterization. I can tell you what they did. (Aside.) Did they come back? No.

REP. BACA: Okay, thank you. This morning the regulators allegated that Fannie Mae did not respond to the initial request for information, and has issued a subpoena. Can you give us your version of the events leading to the release of the information?f

MR. RAINES: We-Congressman, we have been very responsive to OFHEO over this period, specifically relating to subpoenas, We were told, our attorneys were told that the use of subpoenas did not relate to a lack of cooperation, but that this was because OFHEO wanted to move from informal interviews to having them on the record. That's what we were told at the time that the first subpoenas were issued. Because we said to them, you know, There's no need for this-we'll produce the people and we'll produce the documents. They said they wanted to move --

REP. BACA: So you were willing to be cooperative with them, and willing to work with them?

MR. RAINES: We were willing and we were cooperative, providing hundreds of thousands of pages of material, and almost a million pages of e-mail to them as a result of their request.

REP. BACA: Did OFHEO personally contact you regarding the preliminary findings, either one of you?

MR. RAINES: No.

MR. HOWARD: Not me.

REP. BACA: It seems odd that they would not contact you, yet you know they've gone to the media, they've gone everywhere else. But that they should have followed practiced standard procedures which is a total violation. Maybe we should have them on the audit out here versus you guys in terms of not following practice or not following the laws that are in place. Where do you think the process will go from here?

MR. RAINES: Congressman, this process has been so unusual, I can't tell you. I can tell you what we are doing. Our board has negotiated an agreement with OFHEO, which we are going to faithfully follow and put into effect within the timeframe as agreed to between the director and our board.

We are also going to be cooperating with the independent counsel that our board has appointed to look into all of these allegations, and to see if we can find out what the facts are. And so we will cooperate with them. We will be attempting to take the two big accounting issues, FAS 91 and FAS 133, directly to the SEC, and ask them to give us resolution on those, so we can see. And if we're right, then we're right. If we're wrong, we'll make whatever changes the SEC tells us to make. And we will also cooperate with any other law enforcement agency that is attempting to look at these allegations. They are very serious allegations. They have to be looked at. And I'm delighted that today for the first time we're allowed to at least partially give our point of view. But certainly the independent counsel will be looking at every document and every person, and doing a very thorough review, and we look forward to that.

REP. BACA: Thank you. I know that I've served on numerous boards, and usually when an audit is done by any accounting firm, they usually come up with a recommendations for efficiencies, recommendations for improvements. You usually give that non-profit organization an opportunity to correct those deficiencies before any kind of action is taken. And I'm just really appalled at the kind of action that has occurred out here without first discussing it with either one of you two in terms of any corrections or actions that need to be taken. And if there was a difference in terms of methodology, accounting system, what needed to be done-it seems like they would have approached you. So hopefully it will comply with both the laws that are in place right now in terms of standard practices that need to be done.

And, Mr. Chairman, I realize my time is expired, but thank you very much.

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