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Fannie Mae Takes New Approach in Crisis

By Jeffrey H. Birnbaum and David A. Vise
Washington Post Staff Writers
Monday, September 27, 2004; Page A01

Fannie Mae, one of Washington's largest and most influential companies, is facing a serious crisis. Federal regulators have accused the mortgage-finance giant of cooking its books, in part to make room for huge bonuses for its top executives.

When confronted with emergencies in the past -- legislative efforts to tax the company or to end federal ties that give it a competitive advantage -- Fannie Mae has used a brass-knuckles approach. Its political machine, comprised of hired lobbyists, executives and directors of both political parties and grassroots groups nurtured by donations from its foundation, has long been able to run over its adversaries.

Fannie Mae chief executive Franklin D. Raines appeared before the Senate Banking Committee in February. (Dennis Cook -- AP)

_____FANNIE MAE_____
(FNM) Stock Quote and News
Historical Chart
Company Description
Analyst Ratings
Close to Power Fannie Mae has given generously to both Democrats and Republicans, and spends millions of dollars each year lobbying Congress.
Regulator Says Fannie Resisted (The Washington Post, Sep 25, 2004)
Regulator Has No Confidence in Fannie Leadership (The Washington Post, Sep 24, 2004)
Finance Chief Wields Broad Influence (The Washington Post, Sep 24, 2004)
Fannie Employee Raised Concerns (The Washington Post, Sep 24, 2004)
Report Slams Fannie Mae (The Washington Post, Sep 23, 2004)
Warnings Shadowed Firms' Rapid Growth (The Washington Post, Sep 23, 2004)
Probe Examining Fannie's Promises (The Washington Post, Sep 23, 2004)

But this time, Fannie Mae is acting differently. While whispering to Wall Street that all the fuss is nothing more than a difference over accounting interpretations, the company's board has commissioned an independent probe led by former Sen. Warren Rudman (R-N.H.), making it clear that the directors want to put the matter behind the firm even if it means throwing some top executives overboard.

"I don't think they have ever faced a crisis like this. Political muscle is not going to fix this problem," said Washington attorney Bill Lightfoot, who tangled with Fannie Mae over tax issues while a member of the D.C. Council.

Fannie's chief executive Franklin D. Raines, chief operating officer Daniel H. Mudd and chief financial officer J. Timothy Howard have the most at risk, with regulators from the Office of Federal Housing Enterprise Oversight telling the board they are not sure they have confidence in current management's ability to make the broad changes needed to fix the accounting problems. The agency also prompted the company to change the employment contracts of those top three executives, to make it easier to fire them.

There are signs the gilt-edged resumes, and political futures, of three former Fannie executives have already been tarnished, because of findings they profited from manipulation of financial results in 1998. Former Fannie Mae chief James A. Johnson, who holds a top post in the Democratic presidential campaign and headed the Kennedy Center and the Brookings Institution; Smithsonian Institution Secretary Lawrence M. Small, who was Fannie Mae's chief operating officer; and Washington lawyer Jamie Gorelick, a former Fannie vice chairman, who has served as deputy attorney general, the Pentagon's top lawyer and a member of the 9-11 commission, joined Raines and Howard in receiving sizable bonuses that year. Regulators allege they were paid after the company improperly deferred other expenses.

Johnson, who headed the vice presidential selection process for Sen. John F. Kerry (D-Mass.), could be the first to feel the fallout. Democratic Party insiders say that Johnson is no longer considered the leading candidate for treasury secretary in a potential Kerry administration. His role as leader of Kerry's transition planning for the White House might also be in jeopardy unless the regulators' allegations are convincingly disputed, they add. "It strikes me those are the most likely outcomes for Johnson," said a senior economic adviser to Kerry, who sought to remain anonymous for fear of reprisals within the campaign.

Johnson declined to respond to requests for a comment.

Small's mention in the OFHEO report is another in a series of personal missteps that have come to light recently. Earlier this year a federal judge sentenced him to two years' probation and 100 hours of community service for the purchase and possession of 206 art objects made with the feathers of protected species. As the director of the nation's largest complex of museums, Small was also ordered to write a public letter of apology and explanation for his actions.

Small, who was Fannie's chief operating officer for eight years, declined to comment on the regulators' report.

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