The Fannie Scandal: The 'Financiopaths' Did It

When Ken Lay died of a heart attack in early July, two questions about the Enron scandal once again floated through my brain: why did Mr. Lay perpetrate one of largest corporate frauds in U.S. history, and secondly, why did he think he could get away with?

I'm not the only person in the nation wondering these great mysteries. The questions are obvious and should be asked. As for receiving a satisfactory answer, well, that's a different matter.

The men (and women) who commit white-collar crime in this nation are creations of the 20th century. Since the caveman era it's been a basic human instinct to hold a club over another human's head and say, "Give me that coconut. I want it." As for playing games with accounting rules, and creating phantom income, well that's relatively new - which brings me to the strange case of Fannie Mae and its accounting shenanigans.

Some 15 years ago I co-authored a book on the savings and loan crisis, called "Inside Job, the Looting of America's S&Ls." During my research - before and after the book - I got to know quite a few FBI agents, assistant U.S. attorneys and others involved in the criminal justice system.

When talking about these cases with investigators one question I kept asking was this: why did these executives think they could get away with it? Not too many prosecutors had an answer. They knew about motive - which is the easy part. Crooked S&L operators like Charlie Keating and David Paul looted their thrifts for money. They saw an opportunity and they exploited it, even if their means were illegal.

All through their trials and tribulations, both Keating and Paul maintained their innocence. Both men were convicted and did jail time. (Some of the counts against Keating were overturned on appeal.) How could these two men - who collectively were responsible for about $5 billion in taxpayer losses - think of themselves as innocent?

My "Inside Job" co-author Stephen Pizzo coined a term to describe white-collar executives who believe in their own innocence despite the overwhelming abundance of evidence to the contrary. The word is this: "financiopath" - which is an amalgam of the words "psychopath" and "financial executive." In other words - to borrow a quote from punk rocker Johnny Rotten - they believe in their own bulls-t.

Which again leads me back to Fannie Mae. This government-sponsored enterprise is looking at a $10.8 billion downward earnings restatement. Once considered a beacon of light in the housing finance industry, Fannie Mae and its former executives - including some politically well connected heavy hitters like Franklin Raines, Larry Small and James Johnson - have been tarred and feathered in public, and have gone into hiding.

FBI investigators are sifting through untold boxes of documents, trying to get to the bottom of the 1998 bonus payments where company executives (who exactly were not sure) made adjustments to a "cookie jar" account allowing the company to meet an earnings-per-share goal (to the penny) that unleashed some $27 million in bonus payments.

In the fall of 2004, when the Office of Federal Housing Enterprise Oversight first unveiled the bonus manipulation allegations, a defiant Frank Raines told Congress, "This is a serious allegation and we strongly disagree with it."

The then-CEO and chairman of Fannie rallied his allies in Congress - most of whom received handsome political donations from company employees or favorable publicity via the GSE's regional "partnership office" media train - who did their best to portray Mr. Raines as the Mother Teresa of housing finance.

My favorite quote came from Rep. William Clay of Missouri who attacked OFHEO pointblank, portraying the congressional hearing as a "political lynching" of Mr. Raines. This was powerful medicine from Rep. Clay who like Mr. Raines is an African-American.

For a day or so after the fall hearing it appeared to some that Mr. Raines had turned the tide, but defiance and hubris can't change facts. The more OFHEO dug into the bonus payments the worse it looked for Raines and his cronies at the top, including CFO Timothy Howard.

Raines and Howard were forced out in December 2004, a few days before Christmas. As things now stand, no criminal charges have been filed in regard to the 1998 bonus payments but if I were a betting man I'd assume that it's just a matter of time.

Manipulating accounting rules for financial gain ($27 million in bonus money) speaks to motive. The rules were bent to allow Fannie's executive elite to walk away with a ton of cash. In some quarters that might be described as stealing.

As for why they thought they could get away with it, I'm not certain. Keep in mind that nothing's been proven in a court of law. Ken Lay was convicted in a criminal court, and his death robbed him of the opportunity to appeal - which brings me back to Fannie Mae.

Shortly before George W. Bush was elected to a first term, Franklin Raines was courting Mr. Lay for Fannie Mae's board. Keep in mind that this was well before Fannie's accounting scandal broke wide open, and about 18 months before Enron imploded. The Raines-courting-Lay story was told to me by a former Fannie executive who said Mr. Raines' motive was to get a politically well-connected Republican on the board to beat back efforts by FM Watch to gain influence with the White House and the GOP-controlled Congress.

Of course, Mr. Lay never joined the board and the rest, as the saying goes, is history. Thanks to his conviction it can be argued that Mr. Lay fits the description of a financiopath. As for Mr. Raines and his former cronies at Fannie Mae (directors and executives alike), the jury is still out. In fact, the jury hasn't been called yet. But a day of reckoning will come one day. It's just a matter of time.

Paul Muolo is executive editor of both National Mortgage News and Mortgage Servicing News. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com