Over the weekend, we got to celebrate not just Labor Day but also the first anniversary of the taxpayer takeover of Fannie Mae. Which led the NYT‘s Gretchen Morgenson to reflect on an earlier capital crime at Fannie Mae.
Franklin D. Raines used to be the chairman and CEO of Fannie Mae. Together with chief financial officer Tim Howard, he resigned in December 2004 after widespread “accounting irregularities were uncovered at the company”.
Raines had presided over not just the company, but also the cooking of its books:
Government inquiries found that between 1998 and 2004, senior executives at Fannie manipulated its results to hit earnings targets and generate $115 million in bonus compensation. Fannie had to restate its financial results by $6.3 billion.
When Raines resigned, the spin he tried to put on what he called his “early retirement” was that he had done the honorable thing, and accepted responsibility for the boondoggle:
“By my early retirement, I have held myself accountable,” Mr Raines said in a statement.
The implication was that this was sufficient punishment, but the Office of Federal Housing Enterprise Oversight (OFHEO), Fannie Mae’s regulator, wasn’t buying:
Almost two years later, in 2006, Fannie’s regulator concluded an investigation of the accounting with a scathing report. “The conduct of Mr. Raines, chief financial officer J. Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae was inconsistent with the values of responsibility, accountability, and integrity,” it said.
That year, the government sued Mr. Raines, Mr. Howard and Leanne Spencer, Fannie’s former controller, seeking $100 million in fines and $115 million in restitution from bonuses the government contended were not earned.
Raines’ share of the $115 million bonus over-payment was a cool $90 million.
The resolution of the lawsuit fell far short of anything resembling justice. The NYT‘s Morgenson says: “Without admitting wrongdoing, Mr. Raines, Mr. Howard and Ms. Spencer paid $31.4 million in 2008 to settle the litigation.” That $31.4 million, however, was arrived at by valuing stock options Raines and Howard surrendered under the settlement at the $20.8 million they were worth at the time they were issued, instead of their almost negligible value at the time of the settlement, and by including $2.75 million that was actually paid by Fannie Mae’s insurance company:
The regulator, the Office of Federal Housing Enterprise Oversight, said Raines had agreed to forgo stock, cash and other benefits worth $24.7 million in exchange for dismissing the charges against him. However, the regulator’s estimate wasn’t the only way of looking at the value of the settlement.
The agreement includes stock options worth $15.6 million at the time they were issued; those options are currently under water. They entitled Raines to buy shares at prices of $77.10 and higher. Fannie Mae’s shares are currently trading at about $29, so the options Raines is surrendering would not produce any benefit to him unless the share price rose dramatically, according to sources familiar with the settlement who spoke on the condition of anonymity because they did not want to be seen as criticizing the regulator.
OFHEO said Raines’s settlement also includes the payment of $2 million to the federal government. That sum would be covered by a Fannie Mae insurance policy, the sources said.
The settlement also includes proceeds from the sale of stock worth $1.8 million, to be donated to programs aimed at assisting financially strapped homeowners. Those are shares Raines had been fighting in court to obtain from Fannie Mae.
He also agreed to part with $5.3 million in other unspecified benefits, OFHEO said.
Raines was one of three former Fannie Mae executives to settle.
Former chief financial officer J. Timothy Howard agreed to a settlement OFHEO valued at $6.4 million — $5.2 million in stock options — and former controller Leanne G. Spencer agreed to pay $275,000.
Howard’s cash payment of $750,000 is also being covered by a Fannie Mae insurance policy, and his options are similarly under water, one source said.
So if you treat the stock options surrendered by Raines and Howard as worthless, and leave out the cash paid out under Fannie Mae insurance policies, here’s how the math works out. Raines, Howard and Spencer pocketed $115 million in fraudulent bonuses. Raines’ paid back $7.1 million (leaving him with a net profit from the fraud of about $83 million). Howard disgorged only $450,000, and Spencer spit back $275,000. Between the three of them, they paid back less than $8 million, so they walked away with an astounding $107 million as the net profit from their fraud.
That’s quite a settlement the government put together. Wonder if anyone in the Obama administration would consider investigating how and why we ended up with such a paltry settlement?
(Morgenson’s NYT article misses the real crime. The focus of her piece is on the $6.3 million taxpayers have paid after the Fannie Mae takeover defending Raines, Howard and Spencer against stockholder lawsuits.)