Fannie's Raines Feels Heat as Stock Slumps

Updated Sept 23

Storm clouds are gathering around Fannie Mae (FNM) chief Franklin Raines.

A 211-page report from Fannie's regulator paints an ugly picture of accounting games, loose audit controls and poor management supervision at the nation's biggest mortgage buyer. The report will likely lead to a restatement of past earnings, a round of regulatory fines and calls on Capitol Hill for greater oversight of the government-sponsored financial firm.

For now, Raines is likely breathing a little sigh of relief, since the Office of Federal Housing Enterprise Oversight report delivers only a glancing blow to Fannie's chairman and chief executive. Still, considering the housecleaning that rival Freddie Mac (FRE) endured following similar allegations last year, some observers wonder how long Raines can maintain his credibility with investors.

Fannie didn't comment, but the sharp decline in Fannie's stock -- it's down more than 10% since news of the report emerged -- suggests that Wall Street may demand a change at Fannie's helm.

"I don't think Franklin Raines will survive it, and that's a shame," says Janet Tavakoli, a structured finance and derivatives consultant. "But he was on notice with what happened at Freddie, and there was burden of due diligence on Raines to put his house in order."

Howard's End?

For now, while regulators note that "ultimate responsibility" for the veracity of Fannie's financial statements rests with Raines, they heap most of the blame for Fannie's longstanding earnings management on the firm's chief financial officer and vice chairman, Tim Howard. The report squarely points the finger at Howard for the "pervasive" deviations from standard accounting rules.

"The special examination found that the chief financial officer, Tim Howard, failed to provide adequate oversight to key control and reporting functions with Fannie Mae," the report says. "We further found that Mr. Howard was instrumental in setting financial targets as vice chairman, and had the authority to meet these targets as chief financial officer."