Fannie must

When a company chartered by Congress to help finance affordable housing for lower-income Americans cooks its books to line the pockets of its managers, one might hope Congress would seek quick reform. It's worth asking why it hasn't.

The company, known as Fannie Mae, is one of the world's largest financial players, a dominant force in home mortgages, and the second-largest borrower in the US after the federal government. A sudden meltdown of this "government sponsored enterprise," as former Federal Reserve chief Alan Greenspan warned, could bring down America's financial markets - dwarfing the impact of Enron's collapse - and require billions in tax dollars to clean up the mess.

On Tuesday, Fannie Mae agreed to pay a $400 million fine relating to an extensive accounting fraud that a federal regulator attributed to Fannie Mae's "arrogant and unethical culture." The book-cooking amounted to $10.6 billion from 1998 through 2004 alone, conducted primarily to ensure millions of dollars in bonuses to top executives. Prosecutions are possible.

That business culture, which lasted for up to 20 years until an accounting scandal broke in 2004, also led the company to try to interfere with the federal investigation through the use of Fannie Mae's extensive resources targeted at influencing key members of Congress.

With that kind of powerful hubris, no wonder legislation to improve oversight of Fannie Mae, and its lesser sibling Freddie Mac, and limit their scope, remains stalled on Capitol Hill.

Some reforms have already started under Fannie's new management, and more are required under the settlement with its regulator, the Office of Federal Housing Enterprise Oversight. A cap has been imposed on the size of Fannie's portfolio ($727 billion), restitution will be sought from past executives, and a ban is in place on buying and holding home loans for its own investment portfolio.

The scandal puts in doubt the whole public mission of Fannie Mae and Freddie Mac to financially lubricate the home mortgage business. If conditions still exist that might allow further corrupt practices, arm- twisting lobbying, and extreme risk-taking, Congress should remove the federal credit nest that the two companies seem to enjoy in the eyes of Wall Street investors.

In the meantime, a bill passed by the Senate Finance Committee to beef up the federal oversight and curb the two companies' size and mission should be passed. (The House bill is a weaker measure.)

Manipulating financial accounts to fool investors and benefit top managers was at the root of many large, recent business scandals. Fannie Mae's mistakes were particularly large and in the public realm, involving a lack of "the values of responsibility, accountability, and integrity," according to the regulator's report. The scandal hasn't generated as much outrage as, say, that over Enron's misdeeds, largely because of Fannie's past largess with politicians' campaigns, its PR prowess, and the tapping of help from the housing industry.

Scaling back Fannie, improving its oversight, altering its governing board, and other such steps are fine. But more root-and-branch reforms will be needed.