updated 6/6/2006 5:34:14 PM ET 2006-06-06T21:34:14

The ousted former chief executive of Fannie Mae, Franklin Raines, was criticized by lawmakers and a federal regulator on Tuesday as a House panel aired government allegations of a six-year accounting fraud at the mortgage giant.

The regulator who oversees Fannie Mae blamed Raines and other senior company officials for the massive accounting failures and alleged manipulations designed to enrich executives. And the chairman of the subcommittee holding Tuesday's hearing, Rep. Richard Baker, R-La., contended that Raines probably lied to Congress when he testified about the debacle in October 2004.

Lawmakers, some of whom had been beneficiaries of Fannie Mae's campaign money, denounced the accounting misconduct, likened the company to Enron Corp. and urged legislative action to tighten the government's hand over Fannie Mae and its smaller government-sponsored sibling, Freddie Mac.

As a huge housing finance company chartered by Congress, "Fannie Mae has a special mandate and position of public trust. The previous management team, led by chairman and chief executive officer Franklin Raines, violated that trust," James B. Lockhart, acting director of the Office of Federal Housing Enterprise Oversight, testified. "By encouraging rapid growth, unconstrained by proper internal controls, risk management and other systems, they did serious harm to Fannie Mae while enriching themselves through earnings manipulation."

Fannie Mae is the largest U.S. buyer and guarantor of home mortgages.

A blistering report issued by the OFHEO examiners last month, the product of a three-year investigation, details what the agency describes as an arrogant and unethical corporate culture, calling the image of company prestige and excellence at Fannie Mae a sham. It said Fannie Mae employees manipulated accounting so senior executives could collect tens of millions in bonuses from 1998 to 2004.

Baker, referring to Raines' 2004 testimony before the panel, the House Financial Services subcommittee on capital markets, said Tuesday, "There seems to be clear evidence to my mind that Mr. Raines perjured himself."

Raines' attorney, Robert Barnett, declined to comment. After the OFHEO report was released last month, Barnett said that "Mr. Raines has repeatedly stated that he never authorized, encouraged or was aware of violations of generally accepted accounting principles at Fannie Mae for the purpose of smoothing earnings, reaching bonus targets or for any other improper reason. The facts on the record and conclusions from previous reports support this statement."

Raines, a prominent Washington figure who was a White House budget director in the Clinton administration, is one of 30 current and former Fannie Mae executives and employees who are being reviewed for possible disciplinary action, termination or forfeiture of their bonuses. Also being reviewed is the current president and CEO, Daniel Mudd.

The OFHEO regulators in September 2004 first brought to light Fannie Mae's accounting-rule violations and alleged earnings manipulation to meet Wall Street targets — disclosures that stunned the financial markets. That December, the Securities and Exchange Commission ordered the company to restate its earnings back to 2001 — a correction expected to reach $11 billion. The Justice Department has been pursuing a criminal investigation.

In last month's action, Washington-based Fannie Mae was fined $400 million by OFHEO and the SEC — one of the biggest penalties ever in an accounting fraud case, according to the SEC. The company also agreed to limit the growth of its multibillion-dollar mortgage holdings, at least temporarily, capping them at $727 billion, and to make top-to-bottom changes in its corporate culture, accounting procedures and ways of managing risk.

"Senior management manipulated accounting, reaped maximum, undeserved bonuses and prevented the rest of the world from knowing about it," Lockhart said at Tuesday's hearing. "They co-opted their internal auditors and other managers. They stonewalled OFHEO. The executive compensation program at Fannie Mae sent senior executives the message to focus on increasing earnings rather than controlling risk."

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