Raines, Federal Regulators Reach Settlement

By David S. Hilzenrath

Former Fannie Mae chairman and chief executive Franklin D. Raines has agreed to a multimillion settlement with a federal regulator over his alleged responsibility for improper accounting at the mortgage finance giant.

The regulator, the Office of Federal Housing Enterprise Oversight, said Raines had agreed to forgo stock, cash and other benefits worth $24.7 million in exchange for dismissing the charges against him. However, the regulator's estimate wasn't the only way of looking at the value of the settlement.

The agreement includes stock options worth $15.6 million at the time they were issued; those options are currently under water. They entitled Raines to buy shares at prices of $77.10 and higher. Fannie Mae's shares are currently trading at about $29, so the options Raines is surrendering would not produce any benefit to him unless the share price rose dramatically, according to sources familiar with the settlement who spoke on the condition of anonymity because they did not want to be seen as criticizing the regulator.

OFHEO said Raines's settlement also includes the payment of $2 million to the federal government. That sum would be covered by a Fannie Mae insurance policy, the sources said.

The settlement also includes proceeds from the sale of stock worth $1.8 million, to be donated to programs aimed at assisting financially strapped homeowners. Those are shares Raines had been fighting in court to obtain from Fannie Mae.

He also agreed to part with $5.3 million in other unspecified benefits, OFHEO said.

Raines was one of three former Fannie Mae executives to settle.

Former chief financial officer J. Timothy Howard agreed to a settlement OFHEO valued at $6.4 million -- $5.2 million in stock options -- and former controller Leanne G. Spencer agreed to pay $275,000.

Howard's cash payment of $750,000 is also being covered by a Fannie Mae insurance policy, and his options are similarly under water, one source said.

All three are barred from receiving compensation from Fannie Mae in the future or from working for a firm that does business with the company.

OFHEO sued the former executives in 2006, seeking to recoup more than $115 million of compensation the agency said they received while Fannie Mae's earnings were misstated, plus penalties that could have exceeded $100 million.

In court papers, the agency said the former executives were unjustly enriched.

"OFHEO's mission is to ensure that the Enterprises operate in a safe and sound manner," OFHEO Director James B. Lockhart said in a statement. "That cannot occur without corporate management providing prudent and responsible leadership and setting the appropriate ethical and overall 'tone at the top.' "

"The Consent Orders announced today represent a satisfactory conclusion to the enforcement actions against these individuals," he said in another statement.

In his own statement, Raines said the "process invoked against me by OFHEO was fundamentally unfair."

"While I long ago accepted managerial accountability for any errors committed by subordinates while I was CEO, it is a very different matter to suggest that I was legally culpable in any way. I was not," he said. "This settlement is not an acknowledgment of wrongdoing on my part, because I did not break any laws or rules while leading Fannie Mae. At most, this is an agreement to disagree."

Howard's attorney, Steven Salky, was more blunt.

"The settlement is a capitulation by OFHEO, reflecting that its concocted claims
never had an ounce of merit," Salkey said in a statement.

Spencer's attorney, David S. Krakoff, said the former controller was pleased to resolve the matter.

"Ms. Spencer maintained throughout this action that the OFHEO reports and allegations had no merit," he said in a statement.

A hearing on the charges were scheduled to be heard by an administrative law judge in September.

The case reached an important juncture in January, when a federal district court judge presiding over related litigation held OFHEO in contempt for failing to turn over certain records for use by the former executives in their defense.

The judge ordered OFHEO to give the executives documents that the regulatory agency considered privileged, but that order has been stayed pending an appeal. OFHEO recently reported that it has spent more than $6 million responding to document requests it said were "overly burdensome."

Raines, who headed the Office of Management and Budget in the Clinton administration, left Fannie Mae in 2004 after the Securities and Exchange Commission determined that it had used improper accounting. The federally chartered mortgage-funding company later corrected its books, wiping out $6.3 billion of previously reported profit.

District-based Fannie Mae reached a settlement with regulators in 2006, agreeing to pay $400 million.

Announcing the administrative charges in December 2006, OFHEO Director James B. Lockhart III said the former executives "improperly manipulated earnings to maximize their bonuses . . . misleading the regulator and the public." These charges cover 1998 to 2004.

Raines's lawyer, Kevin M. Downey, has alleged that Lockhart was using the case to advance the argument that Congress should give regulators more power over Fannie Mae and its rival Freddie Mac of McLean.

OFHEO brought administrative charges against former Freddie Mac chairman and chief executive Leland C. Brendsel in connection with a separate accounting scandal. Though the agency contended that Brendsel could have been held responsible for more than $1 billion of damages and fines, it settled with Brendsel last fall for $16.4 million.

That settlement came weeks into an administrative trial before the same judge who was slated to hear the former Fannie Mae executives' case, and Brendsel was represented by the same lawyer who has been defending Raines.

Brendsel's settlement did not include any admission of wrongdoing, and he continued to deny OFHEO's charges.

In the absence of a settlement in the case of former Fannie Mae executives, an administrative law judge would have presided over a trial-like hearing and issued an opinion. However, the judge's opinion would have been advisory, and the OFHEO director would have decided the matter. That decision is subject to appeal.

In the months leading up to a hearing, Fannie's former executives had sought to turn the tables on the regulator by challenging its oversight of Fannie Mae. But in a recent order Administrative Law Judge William B. Moran rejected that approach.

"OFHEO is not on trial," Moran wrote in a court order.

Staff writer Jeffrey H. Birnbaum and staff researcher Madonna Lebling contributed to this report.

By Dan Beyers  |  April 18, 2008; 1:04 PM ET  | Category:  Fannie Mae
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Please email us to report offensive comments.

You can bet that someone got to the judge. If it were an everyday citizen up on charges, they'd be throwing the book at him. Raines clearly has friends in high places. I say it's time for street justice. While we're at it let's go after president pinhead and vice president smirky-mouth.

Posted by: Yuri Lipitzmeov | April 18, 2008 2:09 PM

There needs to be more transparency into this issue.

Posted by: Anonymous | April 18, 2008 2:16 PM

So one more guy with the means and the connections to buy his way out of his reckoning does so. Why this is even deemed newsworthy anymore is beyond me.

Posted by: Drew Williams | April 18, 2008 3:28 PM

what a freaking joke. throw him in the crow-bar hotel and fine him 25000000.

Posted by: gunclinger | April 18, 2008 3:33 PM

hey yuri,don't confuse raines with being a repub. this guy is a left wing theive holdover from carter and clinton. serves bush right getting broadsided by this idiot. if he could he should have canned him. then everyone would be screaming RACISTS! go figure. america is starting to get fed up withthese jokers,on both sides.

Posted by: gunclinger | April 18, 2008 3:38 PM

Seems to me the Govenment is sweeping this under the rug. It's alright to rape someone as long as you can pay us we'll look the other way. Piss on that. These SOB's put half of America in trouble. Send these piece's of s^%t to the jail house. I'll be contacting my congressman. This is the rich looking out for the rich. A slap in the face of every American.

Posted by: askgees | April 18, 2008 4:06 PM

see how liberals get away with thir crimes, the same way the thieves on wall street are getting double pay, the first time letting it all go to hell and getting bonuses and now with the bailout. this guy is no different, a liberal grand master who earned millions and got away with his crimes.

Posted by: Dwight | April 18, 2008 4:28 PM

Just proves that liberals and conservatives are crooks.

Posted by: Will | April 18, 2008 4:36 PM

Oh boy was this guy connected.

From the beginning no one would touch him.

Does he know where bodies are buried, or something equivalent?
I don't care personally if he walks or rots in jail. Better not to feed another mouth one supposes.

But something REALLY stinks here.

Maybe they're warming up for letting the AIPAC officials off for buying American secrets. Trial supposed to start in APRIL.
Where is it?

'Course thre are enough Americans to give them away to Israel. Maybe that'll be the defense.

Posted by: Heidi | April 18, 2008 4:43 PM

Was he a Bush appointee - or Clinton's?? Whatever, he walked away from a very serious matter. What a joke of a justice system.

Posted by: adjjones | April 18, 2008 5:20 PM

adjjones--Smarten up--look at all the corruption in the bush administration and you will know he appointed him.

Posted by: Richard | April 18, 2008 5:24 PM

Following the same justice template, a bank robber should give back the money stolen and be barred from receiving any future compensation from banks he/she has robbed.

Posted by: tontosage | April 18, 2008 5:37 PM

Without the slightest degree of humour....I am in favor of beating these greedy self serving creatures senseless and water-boarding them, in public, then deporting them and their vile families to wherever their true loyalties be....or to what country would be foolish enough to accept them....

Posted by: Robet | April 18, 2008 5:46 PM

So, more than half of the settlement is money he never had anyway:

"The agreement includes stock options worth $15.6 million at the time they were issued; those options are currently under water."

Posted by: DC Reader | April 18, 2008 5:53 PM

Good heavens. Get a life. Frank Raines is a thoroughly honorable and brilliant man who has just been dragged through four years of nightmare persecution by a completely incompetent federal agency prosecuting him for being a Democrat. The fact that he's rich does not dishonor him. If you look at his enemies, you'll know he's the best. I'm just sorry he can't run for office now.

Posted by: Lynn | April 18, 2008 7:29 PM

Richard, Raines is not an appointee from the Bush Cabinet, he is from the Clinton Cabinet.

Posted by: jay | April 18, 2008 7:46 PM

Democrat, GOP on IND, doesnt matter. Raines had the final say on compensation before the board appvd or whoever approved and they certainly were not entitled to the income and future income they were forced to give up. They were not dragged through anything they didnt create. They should have given it up anyway based on the proven facts of inflating the books. They put themselves through it by not cooperating and I agree Raines is smart good man, just had no oversight of what was going on and there is a price to pay for that, not GET PAID FOR IT.

Posted by: jay | April 18, 2008 7:51 PM

Raines the thief should have gotten at least 20 years at hard labor--His color helped him no doubt about that.

Posted by: Clyde | April 18, 2008 9:25 PM

Franklin Raines should be in federal prison. He is a criminal. And he is a disgrace. I wonder if he has a functioning conscience?
Perhaps more importantly, how can we as a nation maintain tranparency and accountability in our financial(and every other public) infrastructure? This is a challenge for the new President, and for all of us as citizens.

Posted by: jlendvai | April 18, 2008 10:21 PM

This case is not at all about Frank Raines. If its new age versions of the Robber Barons that you are after, then there a many, many 'suspects' more deserving of your wrath (See, any brokerage house on Wall Street). Hell, if it's black new age versions of the Robber Barons that's got your craw all constipated, then, again, there are many, many more 'suspects' more deserving of your ire than Raines.

All of you partisan lemmings should research what happened to the housing market - oops not much study required given the current state of the obvious - after the current administration used its power to 'go after' Fannie and Freddie on behalf of the private mortgage, bond, banking, securities, etc. industries under the guise of supposedly eliminating a built-in GSE interest rate borrowing advantage and allowing everyone to partake in the spoils of bundling mortgages as securities.

Mr. Raines is merely collateral damage, albeit well-paid, in a broader drama of unbridled greed and unregulated excess. No mnatter the level of your hate, just please emove your blinders and follow the money - the real money! The journey just might be illuminating. B

Posted by: bldlcc | April 18, 2008 10:36 PM

i guess i should quit selling heroin and israeli made automatic rifles to pre-schoolers. if i get caught, i will go to prison for life.

but to keep the money coming in.. i think i'll become a white collar embezzler and steal money from corporations and the federal government.

then if i'm caught, i just have to buy my way out.

no jail time.

no record.


ain't life sweet if you are rich and white?

Posted by: presGWBfanclub | April 19, 2008 12:28 AM

He was appointed by Clinton! Look it up. He is the same guy that forecasted surpluses "as far as the eyes can see"

Posted by: Mike D | April 20, 2008 6:00 PM

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