Fannie Mae dismisses CEO, CFO
By Greg Farrell, USA TODAY
Franklin Raines, the powerful and politically savvy CEO of Fannie Mae, was forced out Tuesday night by the mortgage finance company's board of directors, bringing an end to a contentious, three-month public brawl over the quality of Fannie's financial statements.
That restatement of earnings is likely to wipe out $9 billion or about one-third of Fannie Mae's profits since 2001. But analysts say that shouldn't have any effect on mortgage rates.
To make up the anticipated $9 billion shortfall, Fannie Mae probably would have to sell part of its portfolio of mortgages, raise fresh capital by issuing stock or cut dividends and its spectacular growth of recent years could be curtailed. The company was ordered by the regulators in September to boost its capital cushion against risk by some $5 billion by mid-2005.
Chief financial officer Timothy Howard also was dismissed Tuesday. The board named director Stephen Ashley acting chairman, Chief Operating Officer Daniel Mudd acting CEO and Executive Vice President Robert Levin acting CFO until permanent replacements are found.
The board also dismissed KPMG, the auditing firm that approved Fannie's accounting.
In a statement late Tuesday night, Raines said he decided to leave to fulfill a pledge he made during congressional testimony in October that he would take the blame if serious accounting problems were found at the company.
"By my early retirement, I have held myself accountable," Raines said.
Ever since the Securities and Exchange Commission declared last week that Fannie did not conform to generally accepted accounting principles, Raines' ouster seemed inevitable. But the 55-year-old executive, a former budget director under President Clinton, fought hard to stay, pleading his case to board members on several occasions for support in a vote of confidence. A Sunday meeting ended without a resolution, as the board weighed whether it should dismiss only Howard, the CFO. But Tuesday, Fannie's regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), forced the board to act.
According to a person briefed on the meeting, OFHEO director Armando Falcon issued an ultimatum to Fannie's directors that if they took no action he would declare the government-sponsored finance company out of compliance with its capital requirements, a ruling that would let OFHEO shake up Fannie's management on its own. Faced with that, some Fannie directors met with OFHEO officials and ultimately agreed to oust Raines.
Fannie Mae, long a Wall Street darling, is the biggest buyer and guarantor of home mortgage loans in the United States and is the country's second largest financial institution behind Citigroup.
Prior to Fannie's accounting problems, Raines was one of the most powerful African-American executives. A former Rhodes Scholar and investment banker before joining the Clinton administration, Raines had been touted as a possible Cabinet member if Sen. John Kerry had won the presidential election.
At a congressional hearing in October, Raines challenged the findings of an OFHEO investigation into Fannie's accounting and said the SEC should be the final arbiter of whether Fannie had done anything wrong. He also vowed to hold himself responsible if any accounting violations had occurred. In a statement Tuesday night, Raines said he was "retiring" as chairman and CEO. "By my early retirement, I have held myself accountable," he said.
"Nobody takes pleasure in the misfortune of others, but we can be grateful that none of the terrible activities disclosed to date has had any negative consequences on the taxpayers or the housing market," said Rep. Richard Baker, R-La., and a member of the House Financial Services Committee. "Given the unbelievable statements Fannie executives made at our last hearing, this action was entirely necessary."
In addition to OFHEO's investigation and the SEC probe, the Justice Department is pursuing a criminal investigation.
The problems at Fannie Mae are similar to accounting difficulties encountered by its smaller competitor, Freddie Mac, which emerged from its own accounting scandal and executive shake-up after disclosing in June 2003 it had mis-stated earnings by $5 billion.
Contributing: Associated Press
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