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Former CEO Raines Says Fannie's Woes Not of His Making

Raines said that as Fannie chief executive, he rejected moving significantly into the kinds of investments that later got the company in trouble.
Raines said that as Fannie chief executive, he rejected moving significantly into the kinds of investments that later got the company in trouble. (By Linda Davidson -- The Washington Post)
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By Zachary A. Goldfarb
Washington Post Staff Writer
Monday, December 8, 2008

A few months ago, Franklin D. Raines was traveling in Italy when he received an e-mail saying that Republicans were trying to tie Barack Obama to him in the presidential campaign. Raines had left the helm of Fannie Mae in 2004 amid controversy, and now Fannie was faltering, taken over by the government and blamed by some critics as a cause of the financial crisis. A McCain campaign ad featured Obama and Raines side by side and suggested Raines had instigated a financial fraud at Fannie.

"I was like, 'How did I get to be the Willie Horton of 2008?' " Raines said in an interview Friday, referring to the subject of a famous campaign ad used to undermine the 1988 Democratic presidential nominee. Raines had spoken to Obama fundraisers about housing policy earlier in the year, but his contact with the candidate was limited to a five-minute conversation four years earlier.

Thrust into the spotlight during the political campaign, Raines will reemerge once again tomorrow when he and his successor at Fannie Mae, Daniel H. Mudd, are slated to join the most recent former chief executives of Freddie Mac, Leland C. Brendsel and Richard F. Syron, before the House Oversight and Government Reform Committee. The panel is examining what brought down the mortgage giants and led to the government takeover.

In an interview, Raines says he is sorry about the harm done by accounting errors while he was chief executive, but he continues to reject the view of federal regulators that Fannie manipulated earnings to boost profits and bonuses. The restatement reduced earnings by $6.3 billion and cost shareholders more than a billion dollars to fix. Nevertheless, he says he was held accountable for the scandal. He resigned. And, he says, of the $90 million the government says he was awarded in compensation, he has lost $36 million in stock options that either have no value because Fannie's stock price has collapsed or he forfeited as part of an agreement with the government.

"All of these accusations, and particularly the back and forth in the campaign, has put a scarlet letter around my neck," said Raines, 59. He has spent the past few years fighting court battles related to his time at Fannie but largely operated out of view, managing personal investments in health and financial services firms from his corner office at District-based Revolution.

Raines said he resigned from Fannie before the company made the decisions that ultimately undermined its financial health. From 2005 to 2007, Fannie aggressively entered the business of guaranteeing securities backed by mortgages that had been made to borrowers with little or no verification of income or employment. Raines said that as chief executive, he had rejected moving significantly into that market. "These loans were bad loans from the beginning. It was knowable these were bad loans," Raines said. "You have a world in which very smart people at Fannie Mae and elsewhere suspended disbelief."

Raines became a polarizing figure during his tenure at Fannie's helm, 1999 to 2004, tussling often with the company's federal regulator, the Office of Federal Housing Enterprise Oversight. His rag-to-riches story -- the son of a Seattle janitor who went to Harvard for college and law school and Oxford as a Rhodes scholar -- attracted much attention. He was the first African American to lead a Fortune 500 company. But his compensation -- in one year, $20 million -- drew criticism.

The accounting scandal that surfaced in 2004 threw Fannie and Raines into severe tumult. The company's regulator announced that Fannie had manipulated accounting to inflate profits and later reported the firm engaged in "extensive financial fraud" over six years by doctoring earnings so executives could collect hundreds of millions of dollars in bonuses. A separate report, done by former senator Warren Rudman, found that Fannie engaged in inappropriate accounting but that Raines didn't know it departed from the rules in significant ways.

Several questions were left unanswered, though. For instance, Raines said in the interview that he cannot recall attending an "earnings alternative meeting" on his calendar that investigators had uncovered as they examined how executives allegedly sought ways to delay counting expenses so that annual profit could be as high as possible, triggering bonuses. But Raines concedes that others present at the meeting told him he was there.

Fannie ultimately agreed to pay $400 million in penalties, and Raines and other executives stepped down.

Raines said the assertion that he acted inappropriately to inflate earnings was untrue. "There's a mythology that's been created that somehow the company undertook accounting positions in order to increase profitability and -- even worse -- compensation," he said.

He said that while mistakes were made, there were good-faith efforts made to comply with complicated accounting rules. "People can disagree, but it doesn't mean they got some malicious intent," Raines said. "There were several hundred companies who had to restate because of" the accounting rules. "You only hear about Fannie and Freddie."

Raines said he has paid the price for the problems at Fannie under his watch. He points out that Fannie earned $20 billion during his tenure. But he said he lost about 40 percent of his compensation, which was in the form of stock options that had no value or had been forfeited. "If people think I made a lot," Raines said, "if you take 40 percent away, that is a lot." He still gets a $1.2 million annual pension from Fannie.

Raines said he has only one regret: "I could not find a way to depoliticize the regulatory issues around Fannie Mae." Indeed, a partisan war broke out over the firms during his helm.

In general, Republicans sought to rein in Fannie and Freddie. Democrats defended them as crucial tools for affordable housing. The companies spent tens of millions to rally lawmakers to their cause.

The early Bush administration seemed to favor Fannie and Freddie. Raines and his counterpart at Freddie, Brendsel, once flew on Air Force One with the president after attending a minority housing event in Atlanta. But Raines says attitudes changed after the Enron corporate scandal.

"When . . . the accusations were made that somehow Enron was closely connected to Bush people because it was a Texas firm and this was a Republican scandal, it was as though a light switched on and their view of Fannie and Freddie switched and they decided to have a Democratic corporate scandal," Raines said.

Raines alleges that the Bush administration pushed Fannie's regulator to attack the company for political reasons and has been wrestling with the regulator and White House in court in an attempt to obtain documents to prove the point.

The White House has a sharply different view on Raines's tenure.

"Franklin Raines has been trying to rewrite history for the past four years. Fortunately the history is well-documented, and no amount of his spin can change it," said Tony Fratto, a White House spokesman. Fratto said the administration had been concerned about risks posed by Fannie and Freddie since 2001.

He added, "Raines should have a better understanding of the accounting scandals . . . given Fannie Mae's alarming record under his leadership."

Raines sold his company-granted stock in Fannie in 2005; Fannie shares have lost 99 percent of their value since then. Earlier this year, he invested $100,000 in the firm, thinking it could rebound after being hit hard by the housing downturn. He lost most of that investment when the government took over the firm.

Raines continues to strongly defend the missions of the companies. Some critics have said that Fannie and Freddie simply cannot support public policy and private shareholder missions at once. Some have gone on to say it was a push for the companies to support affordable housing that led them astray. He rejects that view. "It's not the model," he said, "and it's not poor people, and it's not minorities who are the problem."

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