What went wrong at Fannie Mae? The answer is 6.46. That was the ambitious EPS goal that then CEO Franklin Raines set for the company. To achieve that goal, Fannie Mae operated under a different set of rules siting the mantra “what is good for Fannie Mae is good for housing and the nation”. Unfortunately, the company missed that goal in 1997 and was about to do the same in 1998. Mr. Raines was not about to let that happen again but an accurate recording of the problem would have caused Fannie Mae to miss its’ EPS target and result in no bonuses for Fannie Mae leaders. According to later reports, Fannie Mae, after its books were closed, went back through the numbers and used a number of “cookie-jar” accounting tricks to improve the perception of earnings. How big a deal was this obsession with EPS? It was a huge deal. It dominated the corporate culture and ultimately cost Fannie Mae $1.3 billion in 2005. The irony is that this all could have been avoided. Many of the accounting tricks being used were identified early on by a lower level accounting team member. When that team member brought the irregularities to the attention of his manager, he was reprimanded and told to “just do what he was told”. Because of the culture (which prevailed from the boardroom to the boiler room) and a fear of “rocking the boat”, the accountant backed down, looked the other way, and allowed things to continue. Had he been better able to handle the tension created by bringing the issue to his boss and persisted that the company look into the matter, it’s quite possible that Fannie Mae could have experienced a very different outcome.