Sources: Fannie to Announce Raines's Resignation

By David S. Hilzenrath and Kathleen Day
Washington Post Staff Writers
Tuesday, December 21, 2004; 6:00 PM

Fannie Mae will announce tonight that chairman and chief executive Franklin D. Raines has resigned, according to two sources familiar with the decision. The action comes just days after U.S. securities regulators confirmed that the mortgage industry giant had made serious and costly errors of financial reporting.

Chief Financial Officer J. Timothy Howard also resigned, the sources said.

The company's board of directors had been looking for ways to keep Raines in the top spot but could not find a solution that would satisfy federal regulators.

Raines, a former director of the U.S. Office of Management and Budget, is a leading figure in government and industry circles nationally and in Washington.

The moves came as the government-chartered mortgage funding company is preparing to make accounting corrections that could wipe out $9 billion -- or 38 percent of Fannie Mae's profit since 2001.

Raines's long-standing and energetic defense of Fannie's accounting practices crumbled last week when, at the behest of the top accountant at the Securities and Exchange Commission, the District-based company agreed to correct past financial reports.

At an October congressional hearing on the company's accounting, Raines said the buck would stop with him if Fannie was found in error.

"I've always tried my best to ensure that our company does the right thing in the right way," Raines told lawmakers. "If, however, after a thorough review of all the facts, it is determined that our company made significant mistakes, our board and our shareholders will hold me accountable. And I'll hold myself accountable."

Raines, who served for two years as White House budget director under President Bill Clinton, has served as Fannie's top executive since 1999.

Fannie Mae was chartered by the government in the 1930s to ensure that lenders have enough funds to meet the demand for home mortgages. The company borrows money from investors by issuing bonds to purchase mortgages from lenders, giving the lenders cash to make more loans. Fannie also packages mortgages into securities that can be sold to investors.

In September, Fannie's primary regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), expressed doubts about the company's management, issuing a report that accused the company of pervasive accounting violations.

OFHEO stepped up its oversight of Fannie after similar accounting problems led the regulatory agency to force the ouster of top executives at Fannie's direct competitor, Freddie Mac.

OFHEO's September findings focused on Fannie's treatment of complex financial instruments known as derivatives, which the company has used to hedge against movements in interest rates. The OFHEO report found that Fannie had manipulated accounting estimates to achieve desired financial results and deliberately violated other accounting requirements to make its earnings smoother.

Fannie had appealed the findings to the to the SEC. But last Wednesday, the SEC's top accountant, Donald T. Nicolaisen, told Fannie that it should correct its past accounting. The correction could require Fannie to record $9 billion of losses -- the net of $13.5 billion of losses and $4.5 billion of gains that the company had excluded from past earnings. That would leave Fannie with less than the minimum level of capital it must hold in reserve as a cushion against financial setbacks.

Fannie's accounting remains the subject of a probe by OFHEO, a criminal investigation by the Justice Department, a civil investigation by the SEC's enforcement division, class-action lawsuits by shareholders, and an outside review commissioned by Fannie's board.

Former senator Warren B. Rudman, a Republican from New Hampshire who is leading an investigation of the regulators' allegations for Fannie's board, said in a recent interview that his review is "progressing with a lot of intensity and a lot of resources."

Raines came to Fannie in 1999 with strong political ties and a long background in corporate finance. Before joining the Clinton administration as director of the Office of Management and Budget in 1996, Raines spent five years at Fannie Mae as the company's vice chairman. Prior to that, he was a general partner at Lazard Freres & Company.

Raines graduated magna cum laude from Harvard. He studied law at Harvard Law School and was a Rhodes Scholar at Oxford University.

In addition to his roles at Fannie Mae, Raines has been a member of the boards of directors of Pfizer Inc. and PepsiCo Inc. and an overseer for TIAA-CREF.