Covering His Fannie
The top exec of the nation's largest home mortgage financier says he played fair
Before a highly charged congressional hearing last week, Fannie Mae CEO Franklin Raines strongly defended his five-year reign, which was called into question by a scathing report released by the mortgage giant's regulator three weeks ago. A special investigation by the Office of Federal Housing Enterprise Oversight alleged that the company used accounting tricks to smooth earnings and trigger executive bonuses. "I've always tried my best to ensure that our company does the right thing in the right way," Raines told lawmakers. But whatever happens with the ongoing investigation, he added, "I'll hold myself accountable."
It was a strikingly fierce defense compared with that of other embattled CEO s in recent years, many of whom pleaded the Fifth Amendment or testified that they knew nothing of the allegations against them. Raines's testimony, along with that of Fannie Mae's chief financial officer, Tim Howard, followed intense questioning by the lawmakers of OFHEO Director Armando Falcon, who has run the little-known agency since 1999. Falcon himself had earlier been under fire from Republicans who accused him of not doing his job when news of an accounting scandal at Freddie Mac, Fannie Mae's smaller sibling, unfolded in 2003. But last week it was the Democrats who lashed out at the regulator, while Republicans circled the wagons. Falcon's term ended last week, but he agreed to stay until a new director is appointed.
Insiders. Why the flip-flops? Fannie Mae, which buys mortgages from banks and then repackages them to sell to investors, enjoys lucrative perks as a government-sponsored enterprise. While Fannie Mae has long had its critics--especially financial institutions that view Fannie Mae as a pampered bully--Democrats have defended its unique position in promoting homeownership. Some have speculated that Raines, who was budget director in the Clinton administration, could be treasury secretary in a Kerry one.
To protect its status, Fannie Mae has become a lobbying powerhouse, and its executives have become movers and shakers in Washington circles. Raines, for example, is part of a group bringing a baseball team to the nation's capital. Asked by a lawmaker to defend the $245 million in cash bonuses executives have received during the past five years, Raines responded that the figure is merely "a tiny percentage" of the profits Fannie Mae has earned during the same period.
In the end, perhaps the hearing's most significant accomplishment was to turn the discussion of Fannie Mae's alleged wrongdoings away from arcane accounting rules and back to the longstanding--and unlikely to be resolved--philosophical question of Fannie Mae's role in the housing market. This pleased investors, who started pushing the stock back up last week. But the fight is far from over. The Securities and Exchange Commission and the Justice Department, which are also investigating Fannie Mae, have yet to weigh in.
This story appears in the October 18, 2004 print edition of U.S. News & World Report.
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