Raines stays cool under fire: Fannie Mae CEO says cooperation with regulators is not admission of guilt.
Franklin Raines has survived another round of scrutiny at Fannie Mae--but not without concessions as the nation's largest source of financing for home mortgages has its accounting practices investigated. In an October congressional hearing, CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. Raines deflected allegations made by the Office of Federal Housing Enterprise Oversight (OFHEO OFHEO Office of Federal Housing Enterprise Oversight (US HUD) ) that his company engaged in accounting improprieties that hid earnings volatility, disregarded accounting standards, and in one case, secured $3 million in bonuses for Raines and his predecessor, James A. Johnson James A. Johnson could refer to:
"We take this report seriously," Raines told members of the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.
Republican and Democratic lawmakers sparred over the 200-page report, released by OFHEO Director Armando Falcon Jr. The report charged that there are "serious safety and soundness concerns," about how Fannie Mae Fannie Mae: see Federal National Mortgage Association. executives have been running the enterprise.
Shortly after the report was released, and after its stock dropped 15%, Fannie Mac agreed to raise its core capital level. The report suggests that capital may have been overstated by as much as $7.5 billion. Last year, OFHEO increased the minimum capital requirement for Fannie Mae's competitor, Freddie Mac Freddie Mac: see Federal Home Loan Mortgage Corporation. , by 30%. Both are government-chartered but publicly traded companies that buy mortgage loans from lenders, providing the lenders with funds to make new home loans.
Also following the report, the Securities and Exchange Commission upgraded its informal investigation to a formal one, allowing federal regulators to subpoena subpoena (səpē`nə) [Lat.,=under penalty], in law, an order to a witness to appear before a court. A subpoena ad testificandum [Lat. company documents and to require the testimony of company executives and employees, and Fannie Mae announced a decision to delay its third quarter earnings report.
During the hearing, Fannie Mae's former financial accounting manager emerged as the whistleblower. Roger Barnes claimed he was forced out of the company in October of 2003 for what he described as a work environment that had grown hostile.
"Fannie Mae espouses a policy of adherence to good corporate governance Corporate Governance
The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. .... The reality, however, is far different," Barnes claimed in a 25-page written testimony. "The atmosphere and culture ... is one of intimidation, restraint of dissenting opinions, and pressure to be part of the 'team.'"
Barnes alleged that beginning in 1999, he had alerted management that Fannie Mac's accounting practices violated the industry's generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records.
Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting , specifically Financial Accounting Standard 91. Barnes claimed he "repeatedly advised management that it appeared that AIMS [the company's amortization integrated modeling system] had been designed and employed to manipulate the level of income reported by Fannie Mae in its earnings statement and other public filings."
In July, BLACK ENTERPRISE reported that the Bush administration wanted the Treasury Department to have final authority over Fannie Mae products, capital levels, and liquidation in a crisis. Federal Reserve Chairman Alan Greenspan Alan Greenspan
Dr. Greenspan is Chairman of the Board of Governors of the Federal Reserve System. Dr. Greenspan also serves as Chairman of the Federal Open Market Committee (FOMC), the Fed's principal monetary policymaking body. asked Congress to place limitations on Fannie Mae and Freddie Mac, fearing that because the lenders had experienced so much growth, an accounting mishap could result in major economic crisis. Over the past decade, Fannie Mae has increased mortgage holdings nearly five times to today's $895 billion. Yet, with its $989.3 billion in total assets (as of June 30), the nation's second-largest financial company maintains that its financial power keeps interest rates low and its high profits feed housing initiatives for the poor.
Bruce Martin, executive director of the Collective Banking Group of Prince George's County in Maryland, which worked with Fannie Mae to help people buy homes, says, "Fannie Mae, under Raines' watch, has reached all-time records for homeownership in the minority community."
Rep. Richard H. Baker (R-La.), chairman of the subcommittee, and Rep. Michael Oxley (R-Ohio), chairman of the House Finance Committee, called OFHEO's report troubling, but Rep. William Lacy Clay William Lacy Clay is the name of two politicians, father and son, from the U.S. state of Missouri:
Fannie Mae neither admits nor denies wrongdoing wrong·do·er
One who does wrong, especially morally or ethically.
wrongdo . Raines, 55, co-chairman of the Business Roundtable Business Roundtable (BRT), an association consisting of the chief executive officers of major U.S. corporations that was founded in 1972 through the merger of the three preexisting business organizations. and board member of Pepsi, Pfizer, and TIAA-CREF TIAA-CREF Teachers Insurance and Annuity Association - College Retirement Equities Fund , is on BE'S 2002 list of Wall Street All-Stars. Before the probe, he was on a short list for posts in a Kerry administration, possibly as Treasury secretary.
Raines said, "Some people have mistakenly concluded that the company's agreement with OFHEO constituted an admission (of guilt).... Let me clarify: This is not the case."
While some speculate as to whether Raines can weather this storm, Rep. Harold Ford Jr. (D-Tenn.) said Rained character is not in question. "It will take a lot to diminish his credibility and reputation." But Ford added, when it comes to Fannie Mac and its regulators, "Both sides have a lot of explaining to do."