Fannie Mae not yet held accountable

Fannie Mae Chairman Franklin Raines resigned last month. He said he was taking responsibility for years of questionable accounting that, by some estimates, will wipe $9 billion in earnings off the books at the nation’s largest mortgage lender.

But unless someone intervenes, it will not wipe millions in past compensation off his personal balance sheet, or affect a monthly pension of $114,000 for life. That’s monthly. For life. And that does not include $8.7 million in deferred earnings to be paid out through 2020, stock options, lifetime health insurance coverage for himself and his family, and a $5 million life insurance policy.

And Raines has the brass to maintain his resignation does not become effective until June 22, which would boost his pension to $116,000 per month. As if he’d miss the extra cash.

Fannie Mae Chief Financial Officer Timothy Howard, who also resigned, stands to get a slightly less outrageous severance package.

If this is accountability, where can the rest of America sign up?

Raines, a Seattle native who started working at age eight to help out his family, had an admirable reputation. His ascent took him through Harvard and Oxford universities, and a partnership at the Lazard Freres & Co. investment banking firm. He was President Clinton’s budget director. He helped negotiate agreements that balanced the federal budget for the first time since 1968.

A little ironic, given the mess at Fannie Mae.

Yet Sterling Savings Bank Chairman Bill Zuppe calls Raines a “great guy.” They met during Zuppe’s recently ended tenure as president of America’s Community Bankers. Fannie Mae will be hard-pressed to find someone as good, let alone better, he says.

Raines and Howard had insisted the company was properly accounting for hedging practices intended in part to help insulate earnings from early mortgage redemptions. Although the outside auditor had flagged some of the numbers as far back as 1999, it was not until the obscure little Office of Federal Housing Enterprise Oversight (OFHEO) started asking questions last spring that other Washington, D.C., officials took notice. When the U.S. Securities and Exchange Commission last month backed up OFHEO, apparently a shock to Raines, he and Howard were forced out by Fannie Mae board members who know politics better than they know accounting. President Bush and Federal Reserve Chairman Alan Greenspan want changes made at Fannie Mae, as does the chairman of the Senate Banking Committee. That pretty much covers anyone who matters.

Zuppe, who shares Raines’ confusion over the accounting for hedging activities, does not expect the upheaval at Fannie Mae to affect consumers. Fannie Mae’s advantage over its competitors in the mortgage market has been its direct access to the federal Treasury. If reforms limit or eliminate that privilege, he says, the effect on retail mortgage rates will be infinitesimal. And given the Bush Administration’s push for increased home ownership, a cutback in the federal government’s affordable housing programs is unlikely, he says.

That’s certainly good news for Spokane, where use of those programs is widespread.

Fannie Mae, was created by an act of Congress in 1938, and has been a powerful institution in Washington ever since. But Fannie Mae, Raines and Howard have much to answer for. Fannie Mae last week announced a private placement of $5.5 billion in preferred stock. More money may be needed to offset adjustments for the bogus bookkeeeping.

Fannie Mae’s stock is worth less today than it was when Raines took over in January 1999. Meanwhile, according to OFHEO, Fannie Mae executives collected a total $245 million in bonuses. The agency says it will seek recovery of any “unjust enrichment.”

Ongoing investigations could lead to the filing of criminal or civil charges.

Raines may truly have been blindsided by OFHEO and SEC findings that Fannie Mae had kept its books improperly. Accounting has become a nightmare for even the best-intentioned companies. But when the adjustments generated massive bonuses for executives and nothing for shareholders, somebody should have asked what kind of house Fannie Mae was building.

OFHEO finally nailed the carpenters.