Business Ethics Fortnight "More Fun than Decent People Think Should Be Legal"

Loyola Marymount University (2)

Team Members: Kevin Komenkul, Ash Martin, Jan Minette Laqui, Joel Shackelford

Advisor: Thomas White

Topic/Audience: Fannie Mae

Executive Summary

At the request of Representative Henry Waxman, KLMS completed a comprehensive case study of Fannie Mae including:

All of this was done in anticipation of upcoming legislation that will increase the regulation and oversight involved with this enterprise.

KLMS found accounting principles not in accordance with GAAP or in compliance with recent guidelines and laws including FAS 91, FAS 133, and the Sarbanes-Oxley Act. Moreover, Fannie Mae has deceived shareholders by manipulating earnings and it operates with an implicit governmental backing that eliminates market disciplines that are usually in place to control a company’s capital requirements. Finally, Fannie Mae top executives have acted unethically. This was found to have permeated through the company to its employees and created an environment of unethical behavior, including most recently the forging of executive signatures on financial documents.

It is the recommendation of this group that your office support the upcoming legislation that will further regulate this enterprise. The legislation seeks to create a stronger oversight board for Fannie Mae and its sister company, Freddie Mac. This oversight board will be under the Federal Reserve System, as opposed to the Department of
Housing and Urban Development (HUD). It will immediately increase the capital requirements for this enterprise and have the power to put it in receivership for noncompliance or any other deviation from its charter mission. It will also increase the SEC disclosure requirements to provide more transparency for the shareholders.

It is our belief and hopes that the legislation will bring this enterprise in line with its industry, protect its shareholders from any further deception, and reduce the risk of collapse of this financial giant, saving the American taxpayer from the macro-economic risk associated with such a collapse. But most importantly, we feel this is the necessary step to getting Fannie Mae back to its charter mission of providing homeownership opportunities for low-moderate income families.