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FALLOUT AT FANNIE MAE | Challenging Corporate Resolve

A Personal Test

Raines's Future in Doubt as Company's Board Meets

By Terence O'Hara
Washington Post Staff Writer
Monday, December 20, 2004; Page E01

Franklin D. Raines's annual holiday party is as much a gathering of friends as it is a testament to his status. This year's soiree, three nights ago, drew dozens from the upper reaches of Washington's business and political worlds to his Northwest Washington home.

The affair fell at the end of what was arguably the worst week of Raines's professional life, and his uncertain future as head of Fannie Mae was one of the main topics of conversation.


Since his appointment as chief executive in 1999, Franklin D. Raines has been the public face of Fannie Mae, its ambassador to both government and Wall Street. (Brendan Smialowski -- Bloomberg News)

_____Graphic_____
Fannie Mae Under Raines The financial and stock performance of Fannie Mae since Franklin D. Raines became chief executive in 1999.
_____More From This Series_____
Deep Political Support Often Blunted Efforts To Step Up Regulation (The Washington Post, Dec 20, 2004)
Executive Fought Accounting Rules That Bit Company (The Washington Post, Dec 20, 2004)
Smaller Rival Showed Remorse, Cooperated (The Washington Post, Dec 20, 2004)
Problems Won't Affect Move, Developer Says (The Washington Post, Dec 20, 2004)
Scandal Boosts Oversight Agency's Reputation (The Washington Post, Dec 20, 2004)
Sarbanes-Oxley Act Could Punish Executives (The Washington Post, Dec 20, 2004)
A Special Status Examined (The Washington Post, Dec 20, 2004)
Congress Puts New Regulator on the Fast Track (The Washington Post, Dec 20, 2004)
Reassuring Answers (The Washington Post, Dec 20, 2004)
More Fannie Mae Stories

According to a few who were there, Raines was his usual easy self, using dark humor to diffuse any discomfort among his friends as the 55-year-old chief executive faced the possibility of an inglorious finish to his astoundingly successful career.

"Our family is going to our place in Bermuda," Raines told one person who asked about holiday plans. He paused and smiled. "And maybe I'll just stay there."

Raines wholly embraced his role as a celebrity CEO. Since his appointment as chief executive in 1999, Raines has been the public face of Fannie Mae, its ambassador to both government and Wall Street. Almost every page on Fannie Mae's Web site includes his picture. Since an accounting controversy broke three months ago, Raines has put his personal reputation on the line in defending the company's practices and calling into question the motives of its detractors. For years, Raines has personally cast himself and his company as models of good corporate governance.

But Fannie's federal regulator, after a year of investigation, came to a starkly different conclusion in September, releasing a report that cited serious lapses in internal accounting controls, allegedly rigged earnings and willful flouting of accounting rules. Then last week, the Securities and Exchange Commission's chief accountant concurred in a stinging rebuke of Fannie's and Raines's public denials of financial logrolling. Fannie Mae's board met Thursday and yesterday as some investors and corporate governance specialists were calling for Raines's ouster. They have not announced a resolution.

Fannie's fall from grace, though it has to do with arcane accounting rules and the impenetrable columns of Fannie's balance sheet, is a deeply personal test for Raines.

"It's very painful for him," said a close friend and business associate, who spoke on condition of anonymity because Raines and the company have asked people close to the situation not to comment to the press. "He's a straight arrow."

Raines himself declined to comment.

Throughout his career, Raines has woven his life story into his public image.

He was born in Seattle, the fourth of six children, to a family that had moved to the city from the deep South in search of a steady paycheck. His father worked as a mechanic at Boeing, his mother as a cleaning lady in the aircraft maker's executive offices. His father suffered from depression and lost his job because of long absences. The family made ends meet with welfare checks. Raines went to work to bring in extra money when he was 8.

Raines excelled in school, becoming class president in high school and a champion debater. He graduated in 1967 with perfect grades and was awarded a scholarship to Harvard University. His cool-headed leadership during the student uprisings at the school in 1969 caught the eye of a professor there, Daniel Patrick Moynihan, the future New York senator. That summer, Moynihan invited Raines to intern in the Nixon White House, where Moynihan was a special assistant to the president.

From there, Raines's career took off: Rhodes Scholar, Harvard Law School, private law practice, domestic policy adviser in the Carter Administration. In 1980, he joined the investment bank Lazard, Freres & Co. in New York, and became general partner in 1985. He quit the job in 1991 to spend more time with his young children, who were living in Washington.

James A. Johnson, then Fannie's chief executive, asked Raines to become Fannie's vice chairman in 1991. The company's offices were a short drive from his home. In his first stint at Fannie, Raines worked mostly in the guts of the company, improving its technology and making its underwriting operations more efficient.

In 1996, President Clinton appointed Raines director of the Office of Management and Budget. He was instrumental in Clinton's budget battles with the Republican-controlled Congress, eventually winning bipartisan support for most of Clinton's spending priorities and laying the groundwork for a balanced budget by 2002.

Raines was not a political operator in the classic Washington sense, say those who worked with him in government. "Fairly distant, all business," said one Clinton staffer who had weekly contact with Raines.

"He's not a politico, he's not part of that world," Johnson told The Post in 1996.

Yet he was not without considerable political skill. Raines's job at OMB put him into close contact with many of the legislators from both parties who had a hand in overseeing Fannie Mae and Freddie Mac.

When Johnson decided to leave Fannie Mae in 1998, he personally lobbied his board to replace him with Raines, who became chief executive in January 1999. He was the first African American to hold the top job at a Fortune 500 company.

In his tenure, Raines's primary tasks have been managing the risks associated with the mortgage finance market, as well as political challenges to Fannie's government-sponsored status.

As a business, Fannie Mae has thrived under Raines. Its revenue grew an average of 11.5 percent a year from 1999 to 2003, its reported net income 22 percent, although the results for those years are likely to be restated. Stockholders during Raines's tenure have fared less well: Fannie's stock, at Friday's close of $70.31, trades slightly below its price on the day Raines took the top job. Fannie pays a regular dividend, but its shares are volatile for the stock of such a large company, trading as high as $87 a share in 2001 and as low as $46 in 2000.

Raines is among the highest-paid chief executives in the financial services sector. In 2003, he took in more than $16.8 million in cash compensation (salary, bonus and long-term incentive payouts), compared with $11.5 million in similar compensation in 2002 and $10.9 million in 2001. He has also received options to purchase more than 700,000 shares from 2001 to 2003.

Raines has managed Fannie's political risk vigorously, deploying campaign contributions, a potent force of lobbyists and allies among homeownership groups, and his personal charm in the service of protecting Fannie Mae's government-sponsored status, which lowers its borrowing costs relative to purely private companies and exempts it from most local taxation.

But it was Fannie's accounting, not its many critics, that has proven the enemy. When publicly confronting the accounting controversy, at an Oct. 6 hearing of the House Financial Services subcommittee overseeing Fannie Mae and Freddie Mac, Raines mustered all his talent to counter the allegations, carefully arguing that the accounting rules in question "are highly complex and require determinations over which experts often disagree."

But he began his testimony not with these arguments, but with himself. These charges, he seemed to be saying, were personal.

"My name is Frank Raines. I'm the son of Ida and Delno Raines. I grew up in Seattle, went to public school, graduated from college and law school. I'm a brother, a husband, a father and friend. . . . I introduce myself in this way not because I'm a stranger to this committee, but because I do not recognize the person, colleagues or company that someone described this morning."


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