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WASHINGTON, DC-Yesterday marked the high water mark in the ongoing $11-billion accounting scandal at Fannie Mae. At the start of the day, Fannie Mae’s board of directors released the findings from Paul, Weiss’ investigation on its accounting, governance, structure and internal controls. That afternoon it announced it would pay a $400-million fine for accounting violations, many of which were highlighted in the report.

The settlement was announced jointly by the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight 2004. “The penalty and settlements represent a major step in correcting a dangerous course that had been followed by one of the largest financial institutions in the world,” said acting OFHEO director James Lockhart. “Unprincipled corporate behavior and inadequate controls will simply not be tolerated.”

Other terms of the settlement include a limit on the growth of Fannie Mae’s portfolio mortgage assets to the level of Dec. 31, 2005. Also, OFHEO has directed Fannie Mae to undertake a comprehensive reform program corporate that includes changes to its corporate culture, specific changes in journal entries, accounting procedures, briefings of the board and officers on legal responsibilities, operational risk, reorganization of internal audit and other control functions.

For its part, Fannie Mae neither admitted nor denied any wrongdoing. “We are glad to resolve these matters,” says Daniel H. Mudd, president and chief executive officer. At the same time, he acknowledged the cloud under which Fannie Mae had been operating. “We have been humbled, even embarrassed. But we have begun to make significant changes.”

Change the company has put in place since the accounting scandal broke, he says, included a new management team, with a new chief financial officer, controller, and chief audit executive. Fannie Mae is also building new chief compliance officer and chief risk officer functions and has reorganized its legal and regulatory functions by adding a new general counsel and eliminating the combined law and policy division.

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