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US: Fannie Mae Ex-Officials Settle

by JAMES R. HAGERTYWall Street Journal
April 19th, 2008

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 worthless.

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 million.

"The settlement is a capitulation by Ofheo," said Steven Salky, who represented Timothy Howard, Fannie's former chief financial officer.

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 department.

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 $15.6 million.

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 at $240,000.

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 subordinates."

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

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