Raines Pulls Fannie's Fat Out of the Fire - For Now

At one point during his congressional testimony in October, Fannie Mae chairman Franklin Raines was on the verge of tears, choked up about how he had to explain to his daughter why her father's company was in the newspaper everyday being accused of wrongdoing.

Anyone watching the hearing who didn't feel sorry for Mr. Raines (especially those of us with children) doesn't have a heart. At that moment it seemed that the attacks on Fannie Mae had gone on too long, had become too personal, too vicious.

It seemed as though Fannie's critics in Congress (and their waterboys in the private sector) could care less about the real facts and due process. At the same time, the issues raised by the Office of Federal Housing Enterprise Oversight regarding accounting irregularities cannot be ignored. If half of what OFHEO alleges is true, Fannie Mae's current executive team and its accountants at KPMG are toast.

A central question that needs to be answered is did Fannie Mae officials knowingly and willfully manipulate accounting rules so they could "make their numbers" and therefore trigger millions of dollars in bonus money. Did Fannie executives intentionally break the rules? Did they conspire to break the rules?

The answer to these questions will decide whether heads should roll at the company and whether the congressionally chartered mortgage giant is in serious trouble with its regulators, its board of directors and its investors (as well as the Securities and Exchange Commission and, potentially, the Department of Justice).

On Oct. 6, in sworn testimony before Rep. Richard Baker's House GSE Subcommittee, Mr. Raines and chief financial officer Timothy Howard got their chance to answer the explosive allegations levied against the company.

How did they do? Raines and Howard came across as convincing, intelligent, and - most importantly - honest. These two men are not fly-by-night developers who bought a savings and loan back in early 1980s so they could jack it up on brokered deposits and fund speculative land deals. Raines and Howard are not Charlie Keating and David Paul.

During the hearing, Raines and Howard had help though. The company's Democratic allies in Congress came to their defense. Rep. William Clay, D-Mo., took a swing and aimed for the fences when he declared, "This hearing is a political lynching of Franklin Raines."

If the Democrats had caved, if a majority of them had bolted the Fannie camp and hopped the fence, Raines and Howard would be gone. Why didn't the Democrats bolt? Because they know these aren't black-and-white issues we're talking about. The allegations center around (somewhat) subjective accounting treatments on $12 billion in hedges.

Yes, only someone who's inhuman would not feel sorry for Mr. Raines, at least for a moment. At the same time it's safe to say the men and women who work in the executive suites at Fannie Mae are grownups. Anyone who is employed there should know full well that the GSE "war" of the past few years - the war against FM Policy Focus and its backers at Wells Fargo and Genworth Financial - is not going to end anytime soon.

The GSE war is a bare-knuckled boxing match where noses are getting bloodied and bones will be broken. Too much money is at stake - billions of dollars in profits. Fannie Mae and Freddie Mac have a big piece of the mortgage pie and here's a news flash - the private sector, the big banks and mortgage insurance companies want it. They want it bad and they're tired of competing against the government eagle. Sick and tired of it.

During the Oct. 6 hearing, Raines probably won the battle but not the war. He will live to fight another day. Fannie's accounting scandal, its "crisis," call it what you will, won't be over until OFHEO and the SEC declare it's over.

Did Fannie officials knowingly cook its books so it could make big bonus money? Raines and Howard say no. OFHEO and Rep. Baker say yes. By midyear 2005 we should have a final answer. In the meantime the industry should keep in mind one central tenant of our justice system: innocent until proven guilty.

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

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