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Fannie Mae's Board Makes No Announcements on Raines

By David S. Hilzenrath
Washington Post Staff Writer
Monday, December 20, 2004; Page A08

Members of Fannie Mae's board of directors met yesterday to discuss the fate of top management, but adjourned without announcing any action.

The company issued no statement about the meeting and a spokesman declined comment.

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Fannie's board has been reassessing the company's leadership since the chief accountant at the Securities and Exchange Commission last Wednesday directed Fannie Mae to make accounting corrections that could negate $9 billion of past profits.

Sources close to the situation have said Fannie's primary regulator, the Office of Federal Housing Enterprise Oversight, was going to take steps to force out chairman and chief executive Franklin D. Raines and vice chairman and chief financial officer J. Timothy Howard unless the executives resigned or the board fired them.

Board members had met Thursday without resolution, as some investors and corporate governance specialists call for Raines's ouster.

The board has been grappling since September with an OFHEO report alleging that Fannie Mae deliberately flouted accounting requirements that it didn't like, manipulated accounting estimates to achieve desired financial results, and tolerated a weak system of internal controls.

The board has hired its own experts to investigate the allegations, but that ongoing review was overtaken by the SEC's directive. The company quickly agreed to do what the SEC asked.

Raines, who headed the Office of Management and Budget under President Bill Clinton, had long defended Fannie's accounting, saying it had been approved by the company's outside auditor, KPMG. However, the company failed to file a standard financial report for the third quarter, saying KPMG was unable to complete its review of the company's finances for the period ended Sept. 30.

Raines told lawmakers at an October hearing that he would respect the SEC's determination on the accounting issues.

"If . . . 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 testified. "That comes with being a CEO. I accepted that burden on the day I took the job, and I accept it today."

OFHEO last year forced out some executives at Fannie's competitor, Freddie Mac, during an accounting scandal. Unlike Fannie Mae, Freddie Mac on balance had understated profits in an effort to present steady and sustainable earnings growth and avoid a big one-time spike.

OFHEO has been fighting in court to deny ousted Freddie Mac executives tens of millions of dollars in compensation, including severance pay.

In a September regulatory filing, Fannie Mae reported that, at OFHEO's behest, it had amended the employment agreements of Raines, Howard, and Chief Operating Officer Daniel H. Mudd to make it easer for them to be fired.

Whether an executive resigns or is fired can make a big difference in severance pay. The financial terms of executive departures are often the subject of high-stakes negotiations.

Fannie Mae plays a behind-the-scenes role in the mortgage business. It borrows money from investors to buy mortgages from lenders, thereby making funds available for more loans. It also packages mortgages into securities, attaching a guarantee that it will pay the promised principal and interest if the borrowers default.

The company's outside directors include presiding director Ann Korologos, who was labor secretary under President Ronald Reagan; Kenneth M. Duberstein, who was chief of staff in the Reagan White House; Frederic V. Malek, chairman of investment firm Thayer Capital Partners; and H. Patrick Swygert, president of Howard University.

Staff writers Kathleen Day and Terence O'Hara contributed to this report.

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