Report Details Raines's Clout at Fannie Mae
Friday, February 24, 2006
Buried in the 2,652-page report on Fannie Mae that was released yesterday was the transcript of a speech a Fannie Mae executive planned to make invoking the name of Franklin D. Raines, former chairman of the embattled mortgage giant.
Sam Rajappa, who at the time worked for Raines as the head of internal auditing, told his employees that under Raines they had a "moral obligation" to make money.
"Remember Frank has given us an opportunity to earn not just our salaries, benefits, raises . . . but substantially over and above," for meeting financial targets, Rajappa planned to say in a February 2000 address to his underlings. "So it is our moral obligation to give well above 100 percent and if we do this, we would have made tangible contributions to Frank's goals."
Although the long-awaited review of Fannie Mae's $10.8 billion accounting meltdown found "no indication" that Raines knew the degree to which accounting rules had been ignored under his leadership, Raines's imprint is palpable throughout the massive document.
A former director of the Office of Management and Budget and among the nation's most prominent black executives, Raines had a reputation as a master problem-solver. But at Fannie Mae, he oversaw a "culture of arrogance" that, according to the report, undergirded the company's problems.
Through an attorney, Raines denied that he fostered the environment painted by the document, a 1 1/2 -year study authored by former senator Warren B. Rudman at the request of Fannie Mae's board. On the contrary, Raines sought to "create a leadership culture that focused on openness and good governance," his attorney said.
Raines said as much while still head of Fannie Mae, telling employees in a September 2003 memo that "our openness and intellectual honesty with each other helps to make us the quick, creative, fast, agile and successful company we are." He added, "We need to be transparent and address the tough questions internally as well."
The company's reality, however, was apparently out of sync with that vision.
Employee surveys taken throughout Raines's time as chief executive -- and referenced in yesterday's report -- portray a corporate culture in which lines of authority were jealously guarded and the flow of information was far from free.
"Many folks are not willing/comfortable to tell senior management what they don't want to hear," said one employee in the legal department, according to yesterday's report.
The report is one of several probes into Fannie Mae's problems, including Securities and Exchange Commission and Justice Department investigations into possible civil and criminal violations.
It said that much of the responsibility for Fannie's accounting problems rests with former chief financial officer J. Timothy Howard and former company controller Leanne G. Spencer and specifically cited them for a plan to delay recording $200 million in expenses in 1998 so the company would meet its profit goals. The "motivation," the report concluded, was to trigger the payment of bonuses to top executives.