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Regulators sue Fannie Mae's former leaders

The executives led the mortgage finance company during an accounting scandal.

By Washington Post
Published December 19, 2006

WASHINGTON - Federal regulators on Monday sued three former Fannie Mae executives, including former chairman and chief executive Franklin Raines, to recoup more than $115-million in compensation they received while the company's earnings were misstated.

In an administrative action, regulators also sought penalties that could total more than $100-million.

Charged along with Raines were Timothy Howard, former chief financial officer of the government-chartered mortgage finance company, and Leanne Spencer, former controller.

The former executives "improperly manipulated earnings to maximize their bonuses," misleading the public and costing the company and its shareholders billions of dollars, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said in a written statement.

Lawyers for the former executives said OFHEO's allegations were false and politically motivated. "Today's complaint is a work of unsubstantiated fiction," said Steven Salky, an attorney for Howard.

Kevin Downey, an attorney for Raines, wrote in a letter today to the OFHEO director that Lockhart is using Raines as a prop in a campaign to tighten regulation of Fannie Mae.

The charges go before an administrative law judge, who will recommend a final decision to the OFHEO director. Raines' lawyer called on Lockhart to withdraw from the matter, saying he was "fatally biased."

Fall from grace

Before Fannie Mae's problems came to light, Raines was one of Washington's most prominent businessmen, widely viewed as a potential treasury secretary. He was also a leader of the Business Roundtable, a lobbying group for chief executives of major corporations, and he worked to repair corporate America's credibility in the aftermath of accounting scandals at Enron and other companies.

Then an OFHEO examination, which the agency accused Fannie Mae of resisting, faulted Fannie Mae's accounting and challenged its management. Relations between the company and the agency have often been antagonistic. In a May report, OFHEO alleged that Fannie Mae lobbied to keep the agency poorly funded so that Fannie Mae "would essentially be regulated only by itself."

OFHEO's director had been warning for weeks that he planned to take action against former Fannie Mae executives, and he has cited the company's problems in calling on Congress to pass legislation giving Fannie Mae's regulators greater power.

Fannie Mae's accounting problems were so extensive that it took two years and cost more than $1.4-billion, including the labor costs for thousands of workers, to redo past financial reports. The accounting corrections, which Fannie Mae completed this month, erased $6.3-billion of previously reported profits. The restatement increased the company's earnings in 2003 and the first half of 2004 but decreased them by more than $7.7-billion in earlier periods.

[Last modified December 19, 2006, 00:48:10]