Fannie Fight About to Get Nastier

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He made more than $20 million last year and is highly influential in Washington. But right now, no one in their right mind would want to be Fannie Mae (FNM Quote) CEO Franklin Raines.

The executive has fought a characteristically tenacious battle to protect his job and defend Fannie as allegations of serious accounting missteps have piled up. Even so, Raines could well be gone from the nation's largest mortgage buyer by the end of this year, with his reputation in tatters. Much rests on what happens Monday.

That's when Fannie is due to file its quarterly financial results with the Securities and Exchange Commission, which has launched a formal investigation of Fannie's books.

Raines' days at the company could be counted on one hand if Fannie fails to file quarterly results Monday, or if this quarterly report fails to include the usual statement from Fannie's auditor, KPMG, that indicates it has reviewed the numbers and doesn't see the need for material modifications.

So far, the company has been content to follow Raines' lead. But Fannie Mae and Franklin Raines aren't one and the same -- and it could be just a matter of days before Fannie's board sees that and moves to strip Raines of his post.

Josh Rosner, an analyst at Medley Global Advisors, believes that the board hasn't moved to pressure Raines because if it fired him now, it would have to pay a severance package. If the company indicates that it's going to restate past numbers, the board would have clear cause for getting rid of Raines. A failure to file with the SEC Monday, or the filing of a report without an auditor's stamp of approval, would likely be enough to force the board's hand. (Rosner has no positions in Fannie stock, and his company doesn't do investment banking work.)

Fannie Mae didn't respond to a request for comment. KPMG and OFHEO declined to comment.

Lagging Indicator

In some respects, getting rid of Raines would be good thing for Fannie investors, since he has underperformed on many levels as CEO.

His opponents over the past five years have included both the Bush and Clinton administrations, Federal Reserve Chief Alan Greenspan, rival banks and Fannie's own regulator, the Office of Federal Housing Enterprise Oversight, or OFHEO. And don't forget short-sellers, who have long wagered that losses on Fannie's balance sheet will make the company a danger to the U.S. financial system.