Fannie Mae Takes New Approach in Crisis

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

Gorelick has told friends that she would seriously consider an offer some day to serve as defense secretary, an aspiration that could be harder to achieve if OFHEO's allegations pan out. In an interview, she said, "I have no desire to go back into government in the near term." She added that she had "knocked herself out" on the 9/11 commission and for the time being is "very happy" working as a D.C.-based partner of the law firm Wilmer, Cutler, Pickering, Hale and Dorr.

At the same time, Gorelick might be spared because, unlike many of the other former or current officers, her responsibilities at Fannie did not specifically include financial matters.

Raines is in the most difficult predicament. In the wake of the regulators' study, Fannie's stock fell 13.4 percent in three days More than any other time in its 36-year history, the District-based company with 4,100 employees in the area finds itself under the microscope.

Besides the board-ordered independent internal probe by Rudman, the Securities and Exchange Commission has begun an informal inquiry. Members of Congress have promised to look into the matter. And OFHEO has hired Stanley Sporkin, a former federal judge and senior SEC enforcement official, to help them in the continuing examination of Fannie Mae.

Raines, budget director in the Clinton White House and chair last year of the Business Roundtable's committee on good corporate governance, now finds himself being criticized by regulators for permitting a corporate culture that made the accounting problems possible.

Until last week, Raines had held his company out as the shining opposite of Freddie Mac, its smaller rival in the housing finance business. Several top officers of that Virginia-based company were ousted last year in the wake of accusations by regulators that it had smoothed earnings improperly. Now Fannie is also accused of using accounting maneuvers to do the same thing, though regulators said they could not yet estimate the magnitude or even whether the results overstated or understated Fannie's bottom line.

By the account of one well-placed Fannie insider, the company's directors were becoming restless because of the lackluster performance of the stock price even before the regulators' report. Raines also had clashed behind closed doors with part of his board over the best approach to deal with Republicans' calls for stiffer regulation. Raines favored fighting such efforts, at least on a few key points, while a number of directors said he should accede to the proposals because in the long run they would help the company's standing with the investing public and on Capitol Hill.

Although a senior company official said the Fannie board wants to deal decisively and swiftly with the allegations of accounting manipulations, two directors who spoke publicly about the probe defended current management. In a written statement, lead outside director Ann McLaughlin Korologos, one of three outside directors on the committee that hired Rudman, said, "Frank Raines is handling this situation just as you would expect a first-class CEO to do -- with honor and absolute integrity. Frank's strong leadership and his commitment to the company's mission are appreciated by every member of the board."

Director H. Patrick Swygert, president of Howard University, said his board colleagues have not taken Raines to task on either regulation policy or the company's stock price. He added: "No one should draw an implication that we are moving to a change in management."

The current crisis is already renewing calls to beef up regulation of Fannie and Freddie, which buy home mortgages from banks and other lenders and package them into securities for sale to investors. Together they help finance about half the home mortgages in the country.