Fannie Mae 2006 Annual Report Download - page 86

Administrative Expenses
Administrative expenses include costs incurred to run our daily operations, such as salaries and employee
benefits, professional services, occupancy costs and technology expenses. Administrative expenses also include
costs associated with our efforts to return to timely financial reporting and restructuring costs. Expenses
included in our efforts to return to timely financial reporting include costs of restatement and related
regulatory examinations, investigations and litigation and also include remediation costs. The table below
details the components of these costs.
Table 10: Administrative Expenses
2006 2005 2004
2006
vs. 2005
2005
vs. 2004
For the Year Ended December 31,
% Change
(Dollars in millions)
Ongoing daily operations costs . . . . . . . . . . . . . . . . . $2,013 $1,546 $1,656 30% (7)%
Restatement and related regulatory expenses
(1)
. . . . . . 1,063 569 —
(2)
87 —
Total administrative expenses . . . . . . . . . . . . . . . . . $3,076 $2,115 $1,656 45% 28%
(1)
Includes costs of restatement and related regulatory examinations, investigations and litigation. Also includes
remediation costs.
(2)
Excludes the $400 million civil penalty that we paid to the U.S. Treasury in 2006 pursuant to our settlements with
OFHEO and the SEC that we recognized in our consolidated income statement in 2004 as a component of “Other
expenses.” However, we include this amount in the line item “Restatement and related regulatory expenses” for
business segment reporting purposes.
The increases in administrative expenses in 2006 and in 2005 were primarily due to costs associated with our
efforts to return to timely financial reporting. In addition, we experienced an increase in our ongoing daily
operations costs during 2006 due to an increase in our hiring efforts and staffing levels, as we redesigned our
organizational structure to enhance our risk governance framework and strengthen our internal controls. We
anticipate that the costs associated with the preparation of our audited consolidated financial statements and
periodic SEC reports will continue to have a substantial impact on administrative expenses at least until we
are current in filing our periodic financial reports with the SEC.
Beginning in January 2007, we undertook a thorough review of our costs as part of a broad reengineering
initiative to increase productivity and lower administrative costs. We have previously disclosed that, while
continuing to focus on core competencies and controls, we expect to reduce our administrative expenses by
$200 million in 2007 compared with 2006, primarily through a reduction in employee and contract resources.
In June 2007, we introduced a voluntary early retirement program that allowed eligible employees to elect to
retire early and receive a severance package that included retirement benefits. We estimate that the costs of
this early retirement program and various involuntary severance initiatives we have implemented or expect to
implement during 2007 will total approximately $100 million in 2007. We continue to believe that we will be
successful in reducing our total administrative expenses for 2007 by $200 million compared with 2006.
As we have previously disclosed, we expect the level of our ongoing daily operations costs to exceed the level
of these expenses for 2006 and prior years because of the significant investment we have made to remediate
material weaknesses in our internal controls by enhancing our organizational structure and systems. We
expect, however, that our 2007 productivity and cost reduction reengineering initiative will reduce our ongoing
daily operations costs to approximately $2 billion in 2008. Our ongoing daily operations costs, or “run rate,”
excludes costs associated with our efforts to return to current financial reporting and also excludes various
costs, such as restructuring and litigation costs that we do not expect to incur on a regular basis. We,
therefore, do not consider these expenses to be part of our run rate.
Administrative expenses totaled an estimated $659 million and $1.4 billion for the quarter and six months
ended June 30, 2007, respectively, compared with $780 million and $1.5 billion for the quarter and six months
ended June 30, 2006, respectively. Of these amounts, restatement and related regulatory expenses and
restructuring costs totaled an estimated $152 million and $323 million for the quarter and six months ended
71