And just when things were starting to look up for Fannie Mae!

The month started out great. The giant mortgage corporation finally filed much overdue Form 10Ks with the Securities and Exchange Commission (SEC) restating earnings from 2001 through mid 2004 and erasing a huge cloud hanging over the corporation, one that nearly resulted in its being de-listed from the New York Stock Exchange.

Next it filed suit against KPMG, its former independent auditor for causing all of its accounting problems. If this suit is successful, and it will take years, it will not only result in repayment of some of the billions of dollars the restatement cost but will do much to restore Fannie's reputation (see, we told you it was their fault.)

Finally Fannie Mae announced a partial restoration of its common stock dividend. Standing at $0.52 per quarter for some time, regulator pressure forced a 50 percent cut in early 2005. Early this month Fannie increased it to 0.40 per share.

Then Monday the other shoe fell. Actually it was more like an axe. The Office of Federal Housing Enterprise Oversight revealed that it was filing civil charges against three of the Fannie Mae executives who had been asked to retire or had resigned - descriptions varied - in late 2004.

Former Chairman and Chief Executive Officer Franklin Raines, former Vice Chairman and Chief Financial Officer Timothy Howard, and former Senior Vice President and Controller Leanne G. Spencer were named as subjects of a Notice of Charges detailing harm to Fannie Mae resulting from their alleged conduct from 1998 to 2004.

OFHEO Director James B. Lockhart in a statement released by OFHEO's Office of the General Counsel on December 18 announced that "The 101 charges (filed) reveal how the individuals improperly manipulated earnings to maximize their bonuses while knowingly neglecting accounting systems and internal controls, misapplying over twenty accounting principles and misleading the regulator and the public. The Notice explains how they submitted six years of misleading and inaccurate accounting statements and inaccurate capital reports that enabled them to grow Fannie Mae in an unsafe and unsound manner. The misconduct cost the Enterprise and shareholders many billions of dollars and damaged the public trust."

The Notice of Charges alleges that the violations and conduct resulted from a pattern of malfeasance, misfeasance, nonfeasance, and misconduct and involved recklessness and was knowing and intention conduct which resulted in unjust enrichment. At the heart of the Charges is the oft-stated belief of regulators that many of the accounting "irregularities" with which Fannie Mae was charged arose out of a desire on the part of executives to manipulate results so as to trigger a generous set of bonuses tied to corporate earnings.

Ms. Spencer's name has not been heretofore prominently featured but Raines and Howard have received a lot of press. Much of the mainly bad publicity arose out of the golden parachutes the two received in return for their resignations/retirement. These came to light in December 2004 and at that time we reported that Raines would receive monthly payments of $114,393 from pension funds for the remainder of his and his surviving spouse's life and Mr. Howard would received monthly payments of $36,071 from the plan. They would also receive lifetime medical and dental coverage for themselves, their wives and underage dependents and corporation paid or reduced premiums on substantial life insurance policies.

At the time his resignation was requested, Raines held vested and exercisable options for over 1.6 million shares of Fannie Mae common stock at $5.5 million less than the actual stock value and his retirement triggered another 380,000 options of undetermined worth. Howard stood to gain $4.3 million in vested options and would receive his salary through June 30, 2007 at an estimated return of 1.7 million.

But the Notice of Charges makes it clear that the three may have had a lot more in their pockets than terminations benefits. The Notice claims that the three received a staggering amount of compensation from 1998 through 2004. The figures include salary and other compensation - that latter of which in the form of bonuses, Performance Share Plan Payouts, Stock Options, and Earnings per Share Challenge Grant Awards were largely tied to Fannie Mae's financial performance. In the case of Mr. Raines, he received over the six years (seven years worth of salary) a total of $91,121,011, only $6.5 million of which was salary. Mr. Howard was paid $3.5 in salary out of a total of $30.85 million in compensation. It hardly seems fair to target Ms. Spencer who received a paltry $7.3 million total; $1.67 million of which was salary.

The Notice of Charges makes 101 claims for relief for specific violations of law: 79 include Raines, 89 Howard, and 73 include Spencer. The suit seeks civil money penalties which could be in excess of $100 million and would require restitution of monies Fannie Mae paid the three, reimbursement of monies paid by Fannie to remedy the consequences of the alleged conduct, and would bar participation of the three from any business relating to Fannie Mae or Freddie Mac and restrict their employment by any other regulated financial institution.

The three are also asked to remit monies by which "they were unjustly enriched under annual and long-term incentive plans and challenge grants during the period 1998-2003 as outlined above.

While the current legal action is addressed to the three former executives and not at Fannie Mae itself, the Notice of Charges hints that the hunt is not over as "OFHEO's Office of General Counsel continues its review of the conduct of other Fannie Mae personnel mentioned in OFHEO's Special Examination."

At the time this article went to press Fannie Mae had not commented, at least through a press release or on their website, about the charges.