THE $US11 billion ($14.9 billion) accounting fraud at Fannie Mae stemmed from an "earnings at any cost culture" and the US mortgage giant still posed a systemic threat to financial markets, Randy Quarles, undersecretary for domestic finance at the US Treasury, said.
A 17-month internal investigation into Fannie Mae's accounting practices, released on Thursday, exposed no new irregularities and did not implicate any of the government-sponsored enterprise's current management. But Mr Quarles renewed criticisms that Fannie's $US1.4 trillion portfolio was not justified by its government mandate of promoting the spread of home ownership, and said any reduction in the portfolio could be staggered over time and need not disrupt financial markets.
"The large portfolio is the legacy of the decade of abuse," Mr Quarles said. "We might have a better controlled and accounted-for systemic risk now, but it is still a systemic risk."
He acknowledged that the report had found that the accounting violations and corporate governance deficiencies were being repaired, but insisted: "The broad systemic risks inherent in the retained portfolio that was at the heart of the process remain unchanged."
Pressure for Congress to pass a bill that would force reductions in Fannie's portfolio has increased since 2004, when Fannie's regulator, the Office of Federal Housing Enterprise Oversight, revealed accounting problems that could force earnings to be restated by up to $US11 billion.
Concerns about the errors at Fannie and at Freddie Mac, its smaller rival, have led to congressional attempts to toughen the monitoring of the two, which are the biggest bond market borrowers in the US after the federal government.
But the 2652-page report did not find evidence that the accounting irregularities were associated with a desire to maximise executive bonuses, except in one instance, but were instead "motivated by a desire to show stable earnings growth, achieve forecast earnings and avoid income statement volatility".
It said many of the suggested changes to Fannie's corporate governance were under way but did not stint on criticism of the original problems.
Employees in crucial accounting positions "were either unqualified for their positions, did not understand their roles or failed to carry out their roles properly", it said. Accounting systems were also "grossly inadequate".
The report found Fannie's former chief financial officer Timothy Howard and former controller Leanne Spencer to be "primarily responsible" for the poor accounting.
However, it cleared Franklin Raines, who was forced to resign as chief executive when the problems came to light, saying he did not know about the irregularities, although he had contributed to a culture that improperly stressed stable earnings and steady growth.
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