A legal settlement with federal regulators requires former senior executives of Fannie Mae,
including former Chief Executive Franklin Raines, to donate about $2
million to charities and give up stock options that may turn out to be
The settlement, announced Friday, brings the
government far less than it had originally sought over alleged
violations of accounting rules. Fannie's regulator, the Office of
Federal Housing Enterprise Oversight, in 2006 sought to require the
three former executives to pay back more than $115 million of bonuses
and pay fines that it said at the time could total more than $100
"The settlement is a capitulation by Ofheo," said
Steven Salky, who represented Timothy Howard, Fannie's former chief
An Ofheo spokeswoman said the government got a good
settlement. "This settlement is at the high end of settlements in
similar matters," she said.
The settlement stems from findings by regulators in
2004 that Fannie Mae violated accounting rules in an attempt to conceal
fluctuations in its earnings. Regulators also found that the
government-sponsored mortgage investor had failed to maintain adequate
risk controls and didn't allot sufficient resources to its accounting
In addition to Messrs. Raines and Howard, former
controller Leanne Spencer is affected by the settlement. All three
continue to deny the allegations against them. Mr. Salky said Mr.
Howard "remains justifiably proud" of his 23-year career at Fannie.
Mr. Raines has attempted to restore his reputation
after an accounting scandal that created big headlines in 2004 and
prompted some critics to compare Fannie to Enron. The episode was
humiliating for Mr. Raines, who worked his way up to lead Fannie Mae,
one of the nation's most powerful companies. He had been mentioned as a
potential treasury secretary in a future Democratic administration.
In December 2006, Ofheo carried out a legal action in
an administrative law court, accusing them of having "improperly
manipulated earnings to maximize their bonuses."
Under the settlement, the three executives are to pay
fines totaling about $3 million, but those will be covered by Fannie
insurance policies, according to lawyers involved in the settlement.
That is on top of a $400 million fine Fannie paid for the accounting
violations in 2006.
Mr. Raines agreed to donate proceeds from the sale of
$1.8 million of his Fannie stock to programs aimed at boosting
homeownership or averting foreclosures. He also is giving up stock
options that Ofheo says had a value at the time they were issued of
A person familiar with Mr. Raines's finances said the
exercise prices for those options are more than double Fannie's current
stock price and that all or most of them are likely to expire with no
value. Ofheo also said Mr. Raines is giving up an estimated $5.3
million of "other benefits," which an Ofheo spokeswoman said related to
his pension and foregone bonuses.
Mr. Howard agreed to donate the proceeds from a sale
of $200,000 of Fannie Mae stock to housing-related programs and also
gave up stock options, as well as benefits whose value Ofheo estimated
Ofheo has previously stated that Mr. Raines received
about $90 million of compensation for 1998 through 2003 and Mr. Howard
$30 million. But the steep decline in Fannie Mae shares has reduced the
value of much of that compensation, paid in the form of stock or stock
options, an Ofheo spokeswoman said.
In a statement, Mr. Raines said the settlement "is not
an acknowledgment of wrongdoing on my part, because I did not break any
laws or rules while leading Fannie Mae."
Messrs. Raines and Howard left the company in December
2004 when regulators announced their findings of accounting misdeeds,
and Ms. Spencer left in 2005. Mr. Raines said Friday that he had
accepted "managerial accountability for any errors committed by
Messrs. Raines and Howard remain defendants in suits
filed by shareholders against Fannie and certain current and former
executives and directors.
Write to James R. Hagerty at firstname.lastname@example.org
- 208 Regulation