Franklin Raines steps down from Fannie Mae: was the former CEO right to shoulder the blame for accounting irregularities?

At the tail end of last year, Franklin Raines, chairman and CEO of Fannie Mae, announced an "early retirement." The news followed months of allegations by the Office of Federal Housing Enterprise Oversight (OFHEO) that Fannie Mae had been cooking its books. When the Securities and Exchange Commission--which Raines had expected would overrule OFHEO--concurred, Fannie Mae's board was left with no choice. Both Raines and Chief Financial Officer J. Timothy Howard had to go.

OFHEO had set its sights on Fannie Mae after sibling Freddie Mac made headlines in 2003 for engaging in creative accounting practices. Raines, who had never seen eye to eye with regulators, was adamant in his declaration that no such improprieties would be found at Fannie Mae. He was wrong.

In a report released last September, OFHEO charged, among other things, that Fannie Mae employed an improper "cookie jar" reserve in accounting for amortization of deferred price adjustments; deferred expenses to achieve bonus compensation targets; and maintained a corporate culture that emphasized stable earnings at the expense of accurate financial disclosures. Raines stated during congressional testimony that he would take the blame if serious accounting problems were found at the company. He was forced to fulfill that pledge. Raines refused to comment.

It is hardly the end envisioned by anyone even remotely familiar with the Rhodes Scholar who has served as chairman of the Harvard University Board of Overseers and director of the Office of Management and Budget under President Bill Clinton. Shortly before his departure, Raines was named one Of BLACK ENTERPRISE'S "75 Most Powerful Blacks In Corporate America" (February 2005). His dismissal is deeply felt by those in his circle who liken it to a death in the family. "It's almost like when someone in your family has been ill and suddenly they die," says Carl Brooks, president of the Executive Leadership Council. "Even though you've had an opportunity to prepare, it's still a shock when it occurs."

Was Raines' departure unjust? Like the rules of accounting, it's a matter of interpretation. "I was raised with the belief that when you're in a position of authority, especially when you're a minority, you've got to be squeaky clean," says Fred McKinney, executive director of the Connecticut Minority Supplier Development Council and an adjunct professor at the University of Connecticut. "They should have been very, very conservative in how they state everything and not try to be on the cutting edge of these accounting rules, given that Fannie Mae's opponents were scrutinizing what they were doing."

Created by Congress during the Depression, the publicly traded company owns more than $900 billion in mortgage-related assets. It does not lend directly to home buyers, but provides liquidity to the market by buying mortgages from banks and other lending institutions that it then holds as investments or sells in secondary markets as mortgage-backed securities.

The case against Fannie Mac hinged in part upon the testimony of Roger Barnes, a former accountant, who testified that he spent five years trying to convince Raines and others that the company's accounting system was flawed and manipulative. In a statement submitted to a House Financial Services subcommittee, he said, "Although Fannie Mae is a company that receives accolades for providing a diverse and positive work environment, it is also plagued by a corporate culture that uses threats, intimidation, and reprisal to create an atmosphere where even those employees with great integrity--employees who rightfully feel duty-bound to report improprieties and irregularities--cannot risk doing so, fearing the retaliation that they know will follow." Sources close to the situation report he received a settlement of more than $1 million after threatening a whistle-blower lawsuit citing racial discrimination.

Rep. Artur Davis (D-Ala.), who sits on the House Financial Services Committee, says that OFHEO put Fannie Mae's directors in an untenable position. "The reality is Frank Raines was forced out, pushed out. The regulator almost dictated his departure before the SEC, the Justice Department, Congress, and the board had a chance to make an assessment of Raines' conduct."