Date: Feature Week of October 3, 2004
Topic: Black Press Business/Economic
Author: William Reed
Article ID: article_ema100304

WILL FRANK FALL FROM HIS HIGH REIGN?

When Franklin Raines returned to Fannie Mae in 1999 from the Clinton White House, he became the first black Chairman and CEO of a Fortune 500 corporation.  Heading a company that is in the top 50 ranked companies, Raines became one of the most powerful people in the world.  Now, Raines may be pushed toward a significant fall, because government regulators have accused top executives of the mortgage giant of mismanagement and serious accounting misdeeds.

Regulators of the Office of Federal Housing Enterprise Oversight (OFHEO) say they believe Fannie Mae executives intentionally manipulated the company's earnings to hit Wall Street analysts' expectations.  OFHEO's report also reflects instances where Fannie Mae executives appear to obstruct OFHEO's investigation.  There is also the possibly that OFHEO officials would refer Fannie Mae�s accounting matters to the Department of Justice.

Raines, who earns over $7 million annually as head of Fannie May, may have to repay millions to the government.  The accounting rouge may have produced Raines and Chief Financial Officer Tim Howard undue bonuses of $1.1 million and $494,000, respectively.  Also, it�s not as if Raines was blindsided by his underlings in the accounting practices at Fannie Mae.  He spent five years there, from 1991 to 1996, as vice chairman.  Now, reeling from the federal regulator's allegations of improper accounting, Fannie Mae has agreed to boost its capital reserve by an estimated amount of $5 billion in the next nine months.

Fannie Mae owns or guarantees slightly more than 30% of the more than $7 trillion in outstanding home mortgages. The government-chartered company buys bundles of mortgages, known as mortgaged-backed securities, from lenders and holds some and resells some to other investors.  Its participation helps keep money available to lend to home buyers.

Formally, a Cabinet-level Budget Director of the Office of Management and Budget (OMB) in Bill Clinton's Presidential Administration, Frank Raines established a sound record of assuring African American familes were priority in Fannie Mae�s lending and assuring non-discrimination among its financial associates for home purchases.  He also established one of the nation�s best employee diversity programs.

Fannie Mae differs from most other U.S. corporations in that it doesn't actually produce consumer products. Formerly known as the Federal National Mortgage Association, Fannie Mae is defined by Congress as a "government-sponsored enterprise."  Chartered in 1938 to spur home ownership by ensuring market liquidity through the buying and selling of mortgages, this government-created institution controls fully one-fifth of the trillion-dollar American mortgage market.

During the 1960s, Fannie Mae was converted into a shareholder corporation privately owned by stockholders. But it still enjoys significant government-backed privileges. First, Fannie Mae is exempt from state and local income taxes, and its capital maintenance standards are lower than those required for purely private institutions. Second and more important, because the company enjoys a government guarantee of its debt, Fannie Mae can borrow billions at ridiculously low rates, gaining competitive advantage and driving up profits.

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