- The Washington Times - Wednesday, December 22, 2004

The chief executive and the top financial officer at mortgage giant Fannie Mae have been forced out, congressional and industry sources said last night, as the nation’s second largest financial institution struggles to deal with revelations of auditing improprieties.

Chief Executive Officer Franklin Raines said last night that he had decided to resign because of his pledge to hold himself accountable if regulators determined the existence of accounting errors.

Recent revelations from government investigators could result in Fannie Mae being forced to restate $9 billion or more in earnings over the past four years.

“By my early retirement, I have held myself accountable,” Mr. Raines said.

Industry and congressional sources, who spoke on the condition of anonymity, said Fannie Mae’s board had been pressured to ask for the resignations of both Mr. Raines and Chief Financial Officer Timothy Howard by the company’s chief regulator, the Office of Federal Housing Enterprise Oversight.

A Fannie Mae statement announced that Mr. Howard had also resigned. The company said it had hired an executive search firm to find replacements for the two men.

OFHEO Director Armando Falcon Jr. said in another statement that his agency had determined that Fannie Mae, the biggest player in the nation’s $8 trillion mortgage market, was “significantly undercapitalized.”

He said the Fannie Mae board was to be commended for the steps it had taken to address its accounting problems.

“We are encouraged that the board’s announcement signals a new culture and a new direction for Fannie Mae,” Mr. Falcon said.

A review by the Securities and Exchange Commission determined last week that Fannie Mae must restate earnings back to 2001 because it violated accounting rules for derivatives — financial instruments used to hedge against interest-rate swings — and for some prepaid loans.

Fannie Mae had previously said a $9 billion restatement was likely if the SEC found its accounting was flawed. That would wipe out about one-third of the company’s reported profits since 2001. Fannie Mae, long a Wall Street darling, is the biggest buyer and guarantor of home mortgage loans in the United States and is the country’s second largest financial institution behind Citigroup Inc.

The revelations of accounting problems in September sent Fannie Mae’s stock dropping by 13 percent to a 52-week low of $62.95. Fannie Mae shares have recovered slightly in recent weeks, settling 93 cents higher yesterday at $70.35 on the New York Stock Exchange before the announcement of the management shake-up.

Mr. Raines, a former head of the Office of Management and Budget in the Clinton administration, received total compensation in salary and bonuses of $20 million last year, while Mr. Howard received $7.7 million.

Fannie Mae’s statement said Mr. Raines’ job as chairman and chief executive officer would be split, with Fannie Mae director Stephen Ashley serving as acting chairman and Chief Operating Officer Daniel Mudd serving as interim chief executive officer while the board looks for permanent replacements.

Mr. Howard will be replaced on an interim basis as chief financial officer by Fannie Mae Executive Vice President Robert Levin, the company said. It said it had also dismissed its auditing firm, KPMG, and had begun a search for a new auditing firm.

Mr. Raines’ abrupt departure represented a sharp reversal of fortune for one of the most influential and politically savvy figures in Washington, known for adroitly applying charm, persuasion and — occasionally — gentle arm-twisting behind the scenes on behalf of Fannie Mae, one of the most politically connected institutions in Washington.

When he was selected to head Fannie Mae in 1999, Mr. Raines became the first black CEO of a major U.S. corporation. As chairman and CEO, Mr. Raines, 55, burnished Fannie Mae’s reputation as a fast-growing yet prudent financial innovator.

He had been successful in fending off efforts by competitors and congressional critics to strip away some of the privileges the company enjoyed as a government-sponsored enterprise, which allowed Fannie Mae to borrow money at below-market rates because investors believed if the company ever got into financial trouble, the federal government would step in and bail it out.

However, a blistering report by the Office of Federal Housing Enterprise Oversight, which was made public in September, cast doubt on Fannie Mae’s past earnings reports and even its financial soundness. OFHEO, the government agency that regulates Fannie Mae, raised the possibility that the company had employed deliberate accounting maneuvers designed to meet earnings targets and thereby bring bigger bonuses to top executives.

Mr. Raines and Mr. Howard defended the company’s accounting in sworn testimony at a congressional hearing in October. Mr. Raines said then that if the SEC also found accounting violations, he would be held accountable by the company’s board and shareholders.

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