All the Devils Are Here [113]
Raines, however, had overplayed his hand. In demanding that the SEC look at Fannie’s account, he assumed it would side with the company rather than its regulator. But he had calculated wrong. On December 15, 2004, at a meeting that included Raines, Falcon, and Justice Department officials, the SEC’s chief accountant, Donald Nicolaisen, announced that Fannie Mae’s accounting did not comply “in material respects” to the accounting rules.
Raines was flabbergasted. “What did we get wrong?” he asked, his voice wavering. Nicolaisen held up a sheet of paper. If the four corners represented what was possible under GAAP accounting rules and the center was perfect compliance, he told Raines, “you weren’t even on the page.” Fannie’s representatives tried to argue that if they couldn’t get it right, no one could. Nicolaisen wasn’t having it. “Many companies out there get it right,” he said.
The restatement was astounding. OFHEO alleged that Fannie Mae had overstated its earnings by $9 billion since 2001, representing a staggering 40 percent of its profits. (Ultimately, Fannie restated its earnings by a “mere” $6.3 billion.) OFHEO also reported that Raines had been paid $90 million between 1998 and 2003—$52 million of which was directly tied to Fannie’s meeting its earnings targets. Raines and his number two, CFO Tim Howard, were forced to step down. Fannie agreed to pay a $350 million civil penalty to the SEC and $50 million to the Treasury. As part of a consent decree with OFHEO, Fannie agreed to hold 30 percent additional capital and stop growing the portfolio. Freddie agreed to the same measures.
There are many former Fannie executives, including Raines and Howard, who will go to their graves believing that the entire scandal was drummed up by OFHEO and the White House solely to bring Fannie down. In August 2006, the Justice Department took the rare step of publicly announcing that it was dropping its investigation into Fannie Mae’s accounting; no criminal charges were ever filed. For that matter, the SEC never filed civil charges against any individual, either. And an investigation by the law firm Paul, Weiss exonerated Raines of any wrongdoing. While OFHEO settled with Raines and Howard, it did so on terms that can only be described as incredibly generous. The bulk of Raines’s settlement—some $25 million—came from stock options he had received that were so out of the money they’d likely never be worth anything anyway. Raines today describes the accounting scandal as “a dispute among accountants,” because Fannie’s outside accountants had agreed with its original interpretation of GAAP. Derivatives accounting is incredibly complex, and the line between sloppiness, aggressiveness, and fraud is often difficult to discern. The fact that the SEC—which had no dog in the fight—agreed with OFHEO suggests that the scandal was real. The fact that the Justice Department declined to prosecute suggests that maybe it wasn’t.
Whichever the case, Raines had no one to blame but himself. CEOs of regulated companies may grouse privately about their regulator, but few are so foolish as to let the relationship become so openly hostile. Whether because of sloppy accounting or something less excusable, Fannie gave its regulator enough rope to hang it with. Having abused its regulator for years, how could Fannie expect OFHEO not to use that rope?
Here’s the stunning thing, though: despite scandals at both Fannie and Freddie, despite a Republican White House, despite some powerful enemies in Congress—like Richard Baker and Senator Richard Shelby, the chairman of the Senate banking committee, even despite the importunings of Alan Greenspan—Congress and the administration took no steps to impose new regulation on the GSEs. That wouldn’t happen until much later.
“Can you imagine