Report Details Raines's Clout at Fannie Mae

At its peak several years ago, Fannie Mae's network of more than 50 partnership offices hosted thousands of public events with elected officials each year.

But it was a hard machine to wield with finesse.

In contrast to his cerebral and diplomatic style as OMB director, Raines at Fannie Mae adopted the sometimes overbearing style the company had become known for under Johnson, according to lawmakers, housing industry executives and others. In 1996, after the Congressional Budget Office issued a report saying Fannie Mae's low borrowing costs were little more than a subsidy from the federal government, Raines personally dressed down CBO officials in a closed-door meeting.

Shortly after he became chairman of the Fannie Mae board, he stunned a group of mortgage insurers, telling them they were headed the way of buggy-whip makers.

Under Attack

It wasn't that Raines had become more combative. During his tenure, Fannie Mae faced more intense scrutiny than it had under Johnson.

Around the time Raines was chosen to be chairman, Fannie Mae made an overture to get involved in life insurance. Not long after, its sister company, Freddie Mac, made an ill-fated attempt to get into the mortgage insurance business. Both events prompted several large banks, which had been customers of Fannie Mae and Freddie Mac but increasingly felt like their competitors, to form their own advocacy group, FM Watch. Ideological critics, who thought the sheer size of Fannie Mae and Freddie Mac posed a threat to the financial system, also stepped up their attacks.

Raines, who often emphasized intellectual honesty and open debate, became more intractable, several former colleagues said.

It was an attitude that permeated the company, said Roger L. Barnes, a former Fannie accounting manager whose allegations of accounting irregularities were largely born out by federal regulators and Rudman's report. When Barnes raised his concerns with Fannie officials, "They said: 'Intellectually you don't know what you're talking about. . . . You're intellectually inferior or out to destroy the mission,' " he said in an interview.

At different points in Raines's term, colleagues tried to persuade him to change the company's tone.

"If we're such a great employer, why aren't we facing the reality of the hard questions and the poor ratings that come in some of the employee surveys? We make a sport, it seems, of paying consultants a lot of money, bringing them in, baiting them, laughing at them and then kicking them out," Daniel H. Mudd, who was then chief operating officer, said in a speech at a July 2000 officer's retreat. Mudd replaced Raines as chief executive.

If such warnings didn't register with Raines, it may be because he thought he had already built an open culture. Under Johnson, town hall meetings with employees were highly scripted. Raines tried to relax them and instituted other changes, such as brown-bag lunches and executive "gab sessions" with employees.

That seeming open-mindedness had limits.

When the company's regulator, the Office of Federal Housing Enterprise Oversight, launched a special examination of Fannie Mae in 2004, Raines, as well as Howard, "did not respect OFHEO's views and treated OFHEO dismissively," board member Kenneth Duberstein told investigators working on the board report.

In October 2004, Raines said OFHEO's preliminary report, which accused the company of massive accounting errors, had "no facts." By December, however, the SEC had endorsed OFHEO's findings, and Raines quickly agreed to retire.

That fall, he had conceded in talking points for a speech to his fellow executives that Fannie's culture had not served it well.

"We may have believed our own PR a little too much," Raines's talking points read. "We allowed ourselves to be arrogant. We thought we had a lot to teach and little to learn from others."