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Fannie Mae CEO faces biggest test of star career

By MARCY GORDON
The Associated Press

BLOOMBERG NEWS Seattle native Franklin Raines is to testify before Congress today about Fannie Mae accounting irregularities.

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Raines, 55, is scheduled to testify before Congress today. It will be his first public comments since allegations of earnings manipulation and management misdeeds became known Sept. 22.

Lawmakers are expected to focus on Raines' assurances to investors a little over a year ago that Fannie Mae, the second-largest U.S. financial institution behind Citigroup, had not "undertaken any transactions to distort our true financial condition."

Raines, once President Clinton's budget director, will defend himself against a government report that criticized Fannie Mae's "culture and environment" for making "these problems possible." The government-sponsored company also faces a federal criminal investigation and a Securities and Exchange Commission (SEC) inquiry.

Fannie Mae shares have tumbled 17 percent in recent weeks, and some in Congress and on Wall Street have called for removing Raines and other senior executives. The shares were slightly higher yesterday, rising 29 cents to close at $66.00

"Investors are feeling as though Frank Raines didn't level with them with respect to the issues that Fannie Mae had," said Lynn Turner, a former chief accountant at the SEC. "It is very difficult for a board to support a CEO who has damaged his credibility with investors."

Franklin Delano Raines Age: 55; born Jan. 14, 1949 Education: Graduate, Franklin High School, Seattle, 1967; B.A., Harvard University, 1971; Rhodes Scholar at Oxford University, 1971-73; J.D., Harvard Law School, 1976. Experience: Chairman and chief executive, mortgage giant Fannie Mae, 1999-present; director of Office of Management and Budget (OMB) in Clinton administration, September 1996-98; Boeing board member, 1995-96; vice chairman, Fannie Mae, 1991-96; partner, investment banking firm Lazard Freres, 1979-91; associate director for economics and government, OMB, 1978-79; associate, Preston Gates & Ellis, 1976-77. Family: Wife, Wendy Farrow Raines, and daughters Laura, Andrea and Sarah. Quote: "It's something I was taught throughout my life, to be something important. ... You don't grow up with the initials F.D.R. without having some appreciation of the role, and the positive role, that government can play in the lives of people throughout this nation and throughout the world." Sources: The Associated Press, Bloomberg News and Seattle Times archives

Whether Raines stays or goes, the result of the inquiries could ripple out to millions of Americans if they face higher rates for new mortgages or for refinancing, some analysts say. Those could be among the consequences if Fannie Mae is required to scale back its mortgage purchases and forced to pay higher rates on its nearly $1 trillion in debt.

The scrutiny is a big change for Raines, an influential figure accustomed to applying charm, persuasion and occasionally gentle arm-twisting behind the scenes. An Oxford scholar-turned-financier, he took the top job at Fannie Mae in 1999 after Clinton's second term in the White House.

It was a major accomplishment but not out of character for Raines, the child of a Seattle janitor. His debating and leadership prowess at Franklin High School, where he was student-body president and football-team captain and quarterback, landed him a scholarship to Harvard.

As Fannie Mae's chairman and CEO, Raines burnished the company's reputation as a fast-growing Wall Street favorite while effectively deflecting attempts to curtail its privileges and practices. In the process, he earned the respect of his peers, co-chairing the influential Business Roundtable and, at one time, leading its corporate-governance task force.

He is one of a handful of African-American CEOs of Fortune 500 corporations, along with Stan O'Neal of Merrill Lynch, Richard Parsons of Time Warner and Ken Chenault of American Express.

"I would hope that a lifetime of demonstrated highest integrity and highest competence would count for something," said Eleanor Holmes Norton, who represents the District of Columbia in the U.S. House and has worked with Raines on the city's finances and other issues. People should withhold judgment until the full facts are known, Norton urged.

"At every turn, I've seen a man who has been diligently cautious. ... I don't know that Frank Raines knows what a corner is to cut," she said.

Analysts say Fannie Mae's troubles could have significant implications for investors.

Fannie Mae and its smaller rival Freddie Mac, while not directly guaranteed by the government, have special privileges including the ability to borrow directly from the U.S. Treasury. In return, they are charged with enabling more low-income and minority people to buy homes.

The implicit links with the government allow Fannie Mae and Freddie Mac to typically borrow money at lower rates than the competition. Those funds are then used to purchase and guarantee billions of dollars of mortgages from banks, many of which are then packaged into securities that are resold to investors.

Today, Raines will go before a House Financial Services subcommittee with Fannie Mae's chief financial officer, Timothy Howard. The Office of Federal Housing Enterprise Oversight (OFHEO) has singled out Howard for blame, saying in a report of the ongoing investigation that he did not provide adequate oversight.

No specific finger has been pointed at Raines, although regulators have raised the possibility of a management overhaul.

It is "difficult to assert ... confidence" in management's ability to change the company's culture and operations, Armando Falcon, head of the OFHEO, told the Fannie Mae board last month.

As CEO, Raines certified in writing the accuracy of Fannie Mae's financial results, so he would have violated a law — enacted in response to the 2002 corporate scandals — had he been aware of the accounting irregularities when he signed off.

Raines is expected to face a tough cross examination today, and his past comments about good governance will likely be a topic of discussion.

"It is wholly irresponsible and unacceptable for corporate leaders to say they did not know — or suggest it was not their duty to know — about the operations and activities of their company, particularly when it comes to risks that threaten the fundamental viability of their company," he told the Financial Services Committee at a hearing in March 2002.

More recently, in July 2003, he summoned reporters to Fannie Mae's headquarters, a stately brick-and-columned building that evokes Colonial Williamsburg, to discuss the Freddie Mac scandal, saying his company didn't "have any of the same issues" and hadn't "undertaken any transactions to distort our true financial condition."

Still, Raines is well connected, with many friends in Washington. His most recent venture is one with widespread popular appeal. Raines is a co-leader of the Washington Baseball Club, a group of investors seeking to buy the Montreal Expos, which is moving to the District of Columbia.

Copyright © 2004 The Seattle Times Company

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