Will Fannie Mae's Board Ever Come Clean?

If you're a director of a publicly traded company who are you responsible to - (1) the executives who put you there in the first place or (2) the shareholders? If you answered #1 you can stop reading this column right here.

When Fannie Mae chairman and CEO Franklin Raines (one of the most "connected" men in Washington) and company chief financial officer Timothy Howard got the boot in December 2004, the GSE's board of directors practically had tears in their eyes.

The only reason the company got rid of Messrs. Raines and Howard was because the Office of Federal Housing Enterprise Oversight was ready to get rid of the board. (One of these days, hopefully, the real story of the board's comeuppance will be told.)

Shortly before - and then after - the two men got forced out (by the board), a handful of mortgage executives close to the GSE had told us on several occasions that the board had no plans to ax two men, despite mounting evidence that they played a key role in bending accounting rules that resulted in what will be an $11 billion downward statement of earnings.

(One of these days this downward restatement will actually happen.)

Now the big question: Why was the board not critical of Messrs. Raines and Howard? Why did it take a regulator holding a baseball bat to their heads to get them to act?

Granted, until the Freddie Mac accounting scandal broke in June of 2003, few politicians had the guts to go after the GSEs, Rep. Richard Baker, R-La., being one of the few. On the surface it appeared to a battle of competitors - the GSEs vs. their critics (and competition) at FM Watch, a group whose mission started as a way to combat GSE "charter creep."

So, as the allegations against Fannie mounted I'm sure Frank Raines made many rationalizations that explained away all the nasty things being said about the company in the trade and business press.

But in the spring of 2004 when OFHEO finally got religion (and funding) - and it suddenly dawned on the industry that Fannie's accounting practices were a joke - what possibly could Mr. Raines have said to his board convincing them that this was all just a political lynching? I haven't got the slightest - and the board isn't talking, not one bit.

Certainly, the board was stacked in Mr. Raines' favor. A cynic might even say he bought them off by using the company's resources and the resources of its charitable foundation to curry favor with them.

Don't get me wrong, folks. It was all legal. That said, the financial ties between Fannie, the Fannie Mae Foundation (which Raines chaired as well) and the directors stinks to high heaven.

Here's just a taste of those ties: director Ken Duberstein was a trustee of the Brookings Institution and John F. Kennedy Center which, combined, received $6 million from the Fannie Mae Foundation. His company did consulting work for the GSE and in 2003 made $375,000 off of Fannie.

Director Patrick Swygert was/is president of Howard University. He also had a seat on the FMF, which gave $450,000 in grant money to his college. (Swygert's son also worked at Fannie.)

Then there's director Ann Korologos who also served as chairman of the Aspen Institute, a nonprofit. Aspen walked away with $280,000 in FMF cash. She was also a visiting fellow at the Urban Institute, which got $2.75 million in foundation money.

Check most of the other directors and you'll find more of the same. All of these interwoven relationships are detailed in a shareholder lawsuit making its way through Federal District Court in Washington.

The bottom line is this: the board didn't act because Fannie and the FMF were a cash cow feeding causes the directors held near and dear. It might be argued that the board dismissed the mounting allegations being levied against Fannie/Raines because they didn't want to kill the golden goose.

Then again, maybe the board might one day explain away all these things. But don't count on it. Fannie Mae shareholders are out $11 billion, but no one's going to jail and all the (alleged) wrongdoers are walking away with plenty of cash in their pockets. Their reputations as financial managers have been sullied and I'm sure the stress of the situation has been tremendous. But too bad. When you make more money in one year than most Americans make in a lifetime, that's the trade-off you've made. These Americans are the people Fannie Mae is supposed to serve.

Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News. He can be e-mailed at Paul.MuoloSourceMedia.com

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