WASHINGTON — The chief executive and top financial officer at mortgage giant Fannie Mae have been forced out, congressional and industry sources said Tuesday, as the nation’s second largest financial institution struggles to deal with revelations of auditing improprieties.
Chief executive Franklin Raines and chief financial officer Timothy Howard were forced to resign, according to congressional and industry sources who spoke on condition of anonymity, as federal officials intensified their investigations into revelations that the company will probably be forced to restate $9 billion or more in earnings over the past four years.
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.
Raines, a former head of the Office of Management and Budget in the Clinton administration, earned total compensation in salary and bonuses of $20 million last year, while Howard earned $7.7 million.
The sources said 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.
Howard will be replaced on an interim basis as chief financial officer by Fannie Mae executive vice president Robert Levin, the sources said. These sources said KPMG was also being replaced as Fannie Mae’s auditor.
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.