How did Peter Niculescu manage to get promoted to the important new position of Chief Business Officer at Fannie Mae? This is how Fannie Mae describes his history at the company after he joined in 1999:
In his previous position as Executive Vice President and head of the Capital Markets business, Niculescu was responsible for the management of the company’s on-balance sheet portfolio investments including interest rate risk management, asset acquisition and funding.
But wasn’t it precisely Fannie Mae’s interest rate risk management which led to the accounting scandals and the firing of CEO Franklin Raines and CFO Timothy Howard? Bethany McLean explained in the January 2005 issue of Fortune just what went wrong at Fannie:
In 2002 accounting sleuths and short-sellers became suspicious of Fannie’s smoothly growing earnings. Fannie’s duration gap made it clear that the company had been on the wrong side of interest rate bets during a period of rapidly declining rates in the fall of that year. Yet that didn’t seem to have had any effect on Fannie’s earnings. John Barnett, then an analyst at the Center for Financial Research and Analysis, which produces detailed accounting reports for institutional investors, suggested that Fannie Mae was distorting economic reality by putting billions of dollars in derivative losses on its balance sheet instead of on its income statement…
In fact the situation was worse than even the harshest critics believed. "We thought their accounting was lousy but legal," said Mark Haefele, who helps run Sonic Capital, a hedge fund that is short Fannie’s stock. "It turns out it was just lousy."
Today, the accounting scandals are in Fannie’s past, and it’s not interest-rate risk bringing Fannie down but rather credit risk. But I spoke recently to someone who’s been following Fannie closely for some time, and he says that it’s it’s more than a little weird that Niculescu not only survived the 2004 putsch but has now been put in charge of all three of Fannie’s business divisions.
Given Niculescu’s position from 1999 onwards, says my source, he should have known that Fannie’s books were being cooked. If that was the case, he should have been fired rather than promoted. And if Niculescu didn’t know what was going on, that bespeaks a lack of ability which puts this latest promotion into question.
At the very least, there’s an appearance of something weird going on here, and it would be nice if Fannie cleared it up. Was Niculescu not in charge of a derivatives book which lost billions of dollars? Did Fannie not get into a lot of trouble for trying to those losses on its balance sheet? And what qualifies Niculescu for his new job?