Updated from 7:52 p.m.

Under pressure from regulators,



board ousted its top two executivesin the midst of a deepening accounting scandal.

CEO Franklin Raines and Chief Financial OfficerTimothy Howard were forced out Tuesday. The move cameas Fannie's regulator, the Office of Federal HousingEnterprise Oversight, issued a statement indicatingthat the company is "significantly undercapitalized,"suggesting Fannie might not have the financialwherewithal to survive a market shock or similarevent.

Raines, who long defended the company's accountingdespite mounting evidence that it wasn't proper,issued a statement late Tuesday conceding that"mistakes were made" and saying he would assumeresponsibility as he had earlier promised.

"I have advised the Board of Directors today thatI am retiring as Chairman and Chief Executive Officerof Fannie Mae," said Raines, who joined the company in1999 after a stint with the Clinton White House. "Ipreviously stated that I would hold myself accountableif the SEC determined that significant mistakes weremade in the Company's accounting. Although, to myknowledge, the Company has always made good faithefforts to get its accounting right, the SEC hasdetermined that mistakes were made. By my earlyretirement, I have held myself accountable."

According to Fannie's statement, issued lateTuesday, Raines retired and Howard resigned. However,news reports indicate the company was under growingpressure from regulators to shake up its management inthe wake of findings that the company's books ranafoul of generally accepted accounting principles forfour years.

The Washington-based mortgage giant named StephenB. Ashley nonexecutive chairman, Vice Chairman andChief Operating Officer Daniel H. Mudd interim chiefexecutive, and Executive Vice President Robert Levininterim finance chief. The company hired executivesearch firm Spencer Stuart and dismissed auditor KPMG,which blessed the questionable numbers, as well.

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The news comes less than a week after the

Securities and Exchange Commission

jolted thewell-connected company by ordering a massiverestatement of earnings going back four years. Fannieindicated it would comply with that order, a decisionthe company previously indicated would cost it to thetune of $9 billion.

At the time of the SEC ruling, speculationregarding the fate of Raines and Howard resumedswirling furiously on Wall Street. Both executives haddefended the company's accounting before a growingchorus of congressional critics.

SEC Chief Accountant Donald Nicolaisen, in astatement released Dec. 15, said thegovernment-sponsored company's accounting for 2001through mid-2004 "did not comply in material respects"with accounting rules for derivatives, financialinstruments used to hedge against interest rateswings, and for some transactions related to loans.

Fannie said this fall that a restatement couldforce it to report after-tax losses on its derivativestransactions of as much as $9 billion. The lossescould cause the company to become severelyundercapitalized, an event that potentially couldforce it to sell stock or assets to raise money.

The SEC findings came on top of a scathing reportfiled this fall by OFHEO. The office contended Fannie Maedeliberately violated accounting rules in an effort tosmooth out quarterly earnings, meet financialprojections and boost bonuses for its top executives.

OFHEO moved to tighten its control of Fannie'saccounting after a similar accounting scandal atgovernment-sponsored peer

Freddie Mac


resultedin a management shake-up and wide-ranging earningsrestatement.

In September, after OFHEO issued its scathingreport on Fannie's accounting missteps, the companyreached an agreement with the regulator to boost theamount of capital it holds to protect it againstlosses and market swings.

On Tuesday, OFHEO indicated that last week'srestatement bombshell would leave the company belowkey capitalization levels.

"The disallowed hedging treatments (SFAS 133)result in an estimated $9 billion cumulative reductionin core capital as of September 30, 2004 as disclosedby Fannie Mae," the regulator said. "This capitallevel places Fannie Mae below its minimum capitalrequirement and results in a classification ofsignificantly undercapitalized. Fannie Mae's criticalcapital level remains above the required threshold andFannie Mae continues to meet its risk-based capitalrequirement."

Fannie also pleged to undertake an investigationof the regulator's claims that the company's internalcontrols and management oversight weren't up to snuff.

"Fannie Mae is a great company deeply committed toits mission of expanding the dream of homeownership toall Americans and serving the nation's housing needs,"said Ann Korologos, the presiding director of thenonmanagement members of the board. "We appreciate themany contributions of Frank Raines and Tim Howard,their devotion to Fannie Mae and their commitment toits mission. Fannie Mae's Board of Directors takesthese steps today to move the company forward to serveits critical mission in a safe and sound manner."

In after-hours trading Tuesday, Fannie rose 8 centsto $70.43.