Civil Charges Filed Against Three Former Fannie Mae Executives

12/18/2006

By David S. Hilzenrath
Washington Post Staff Writer
Monday, December 18, 2006; 5:12 PM


Federal regulators today sued three former Fannie Mae executives, including former chairman and chief executive Franklin D. Raines, to recoup more than $115 million in compensation they received while the company's earnings were misstated.


In an administrative action, regulators also sought penalties that could total more than $100 million.


Franklin Raines, chairman and CEO of Fannie Mae, pauses while speaking during the America's Community Bankers' 2004 Annual Convention October 18, 2004 in Washington, D.C. (Brendan Smialowski - Bloomberg News)


Charged along with Raines were J. Timothy Howard, former chief financial officer of the government-chartered mortgage finance company, and Leanne G. Spencer, former controller.


The former executives "improperly manipulated earnings to maximize their bonuses," misleading the public and costing the company and its shareholders billions of dollars, James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight, said in a written statement.


Lawyers for the former executives said OFHEO's allegations were false and politically motivated. "Today's complaint is a work of unsubstantiated fiction," said Steven Salky, an attorney for Howard.


Kevin Downey, an attorney for Raines, wrote in a letter today to the OFHEO director that Lockhart is using Raines as a prop in a campaign to tighten regulation of Fannie Mae.


The charges go before an administrative law judge, who will recommend a final decision to the OFHEO director. Raines's lawyer called on Lockhart to withdraw from the matter, saying he was "fatally biased."


Before Fannie's problems came to light, Raines was one of Washington's most prominent businessmen, widely viewed as a potential treasury secretary. His resume traced his rise from humble roots to the heights of government and finance: graduate of Harvard College and Harvard Law School, Rhodes Scholar, junior aide to President Jimmy Carter, investment banker at Lazard Freres & Co., chairman of Harvard's Board of Overseers, director of President Bill Clinton's Office of Management and Budget.


He was also a leader of the Business Roundtable, a lobbying group for chief executives of major corporations, and he worked to repair corporate America's credibility in the aftermath of accounting scandals at Enron and other companies.


"As a CEO, one of the most offensive things about the corporate scandals that emerged recently was to hear CEOs claim that they did not know, they could not know, and they could not be expected to know about the activities that brought down their companies," Raines wrote in Fannie Mae's 2002 annual report.


Then an OFHEO examination -- which the agency accused Fannie of resisting -- faulted Fannie's accounting and challenged its management. Relations between the company and the agency have often been antagonistic. In a May report, OFHEO alleged that Fannie lobbied to keep the agency poorly funded so that Fannie "would essentially be regulated only by itself."


Raines's successor as chief executive, Daniel Mudd, distanced himself from Fannie's posture under Raines, saying in congressional testimony this year that the days "of the arrogant, defiant, my-way Fannie Mae had to end."