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Fannie Mae Exit Packages Face Review

Ousted Executives Won't Receive Pay Until Investigation Is Complete

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, December 23, 2004; Page E01

Fannie Mae's regulator has not approved the financial terms of the exits of two top executives and the men won't get that money until investigations of the company's finances are completed, one of the company's congressional overseers said yesterday.

Former chief executive Franklin D. Raines and chief financial officer J. Timothy Howard were forced out Tuesday night after accounting mistakes that could cost Fannie $9 billion in reported profit.

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The company hasn't disclosed the financial terms of their departures, but compensation consultant Brian Foley said yesterday that Raines, 55, could retire with a full pension of about $1.4 million annually for life plus stock options and prorated portions of incentive stock awards that could be worth millions of dollars.

"You're talking potentially a lot of money," Foley said.

"Based on what I know now, no payments will be made until an assignment of responsibility is determined," Rep. Richard H. Baker (R-La.), chairman of the House subcommittee on capital markets, said in an interview. "Meaning if they were complicit in any wrongdoing, they won't get it. If they were not, then they should be entitled to whatever their contract authorizes."

Rep. Barney Frank (D-Mass.), ranking Democrat on the House Financial Services Committee, said it was appropriate for Raines and Howard to go. He added that the severance Raines could get "is excessive and really extremely inappropriate, given the circumstances of his leaving, so I would call on Fannie Mae and Raines both to renegotiate that."

"If Frank Raines takes all that, he's wrong," he said. "That kind of mistake and the problems that they've been through should not be so generously rewarded."

Fannie Mae spokesman Charles V. Greener declined to comment on the financial terms of the executives' departures. He said the company will disclose those details in a regulatory filing.

Corinne Russell, a spokeswoman for the regulator, the Office of Federal Housing Enterprise Oversight, said the agency "will be reviewing their termination packages, and should it be determined that they were unjustly enriched, we have enforcement tools at our disposal to seek recovery."

OFHEO has been waging a legal battle to deny former executives of Freddie Mac, Fannie's competitor, tens of millions of dollars of compensation since they were forced out in an accounting scandal last year. A federal court ruled against OFHEO in a recent decision, saying it was "simply overreaching" when it tried to freeze most of a former chief executive's exit pay.

The agency alleged in a September report that, to smooth earnings, Fannie Mae manipulated accounting estimates and ignored accounting rules that it didn't like. In 1998, the company delayed booking $200 million of expenses, enabling Raines and other executives to receive their maximum bonuses, the agency alleged.

Last week, the Securities and Exchange Commission directed the District-based company to correct financial statements going back to 2001. Under pressure from OFHEO, the company board announced Tuesday that Raines was retiring and that Howard had resigned. Fannie said yesterday in a regulatory filing that its financial statements since 2001 should no longer be considered reliable.

The stock market applauded the management shake-up, boosting Fannie's stock by $1.57, to $71.92. Some Wall Street analysts described the executives' ouster as a necessary or positive step toward restoring the company's credibility.

But Bear Stearns analysts David Hochstim and Scott R. Coren issued a report expressing disappointment that Fannie's board changed management with investigations continuing. "One can only conclude that the board acted in response to the regulator's obsession" with an accounting rule for financial contracts known as derivatives "and personal animosity toward the CFO and CEO," the analysts wrote.

Jonathan E. Gray and Adam B. Weinrich of Sanford C. Bernstein & Co. wrote that "we consider it a serious risk" that the company will be forced to discontinue its dividend for at least two quarters because OFHEO will argue the cash would help Fannie boost its capital reserves.

Foley, who advises major corporations on executive pay, reviewed Fannie Mae disclosures about Raines's pay arrangements at the request of The Washington Post.

Under Raines's contract, he could retire with a portion of Fannie Mae stock awards granted under long-term incentive plans, Foley said. The number of shares would depend on how the company performed against internal benchmarks and would be adjusted to reflect Raines's shortened tenure.

If the company met its performance targets, Foley estimated, Raines could receive about 220,000 shares, which would be worth about $16 million at yesterday's closing price of $71.92. The actual number of shares could be higher, lower or zero, depending on how Fannie performed.

It appears that if Raines was fired for cause, he would not be entitled to receive those incentive shares, Foley said.

Raines's contract says he has the right to retire "by giving not less than six months' prior written notice to the Corporation." It was not clear how that provision squared with Raines's immediate retirement this week.

At OFHEO's behest, Fannie amended Raines's contract in September to say he could be fired for cause for materially harming the company by "engaging in dishonest or fraudulent actions or willful misconduct, or performing his duties in a grossly negligent manner."

The recent amendments also appear to have increased Raines's annual pension by about $345,000, Foley said.

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