And maybe they are abhorrent. Maybe Raines got greedy. Maybe, as the story usually goes, he was so drunk on success, money, and power that he considered himself above the law. Maybe after a lifetime of hard work, he cut corners. Maybe … or, maybe, more likely, he is the same man of discipline, intelligence, honor, and integrity that a half-century of actions and words suggest. If so, we need another explanation for the Fannie proceedings and the assault on Raines.
The simplest, and most conspiratorial, is that the Fannie investigation represents a Republican payback for Enron and Halliburton. Conservatives are delighting in the gutting of Raines and Fannie Mae—a Democratic boss of a Democratic-leaning company. Former Fannie CEO James Johnson, who got some of the bonuses OFHEO criticized, has also been shortlisted as a possible Kerry treasury secretary. The accounting investigation, if nothing else, has probably made both Raines and Johnson untouchables to a Democratic president.
But there is also a bureaucratic explanation for the scandal. Accounting rules are complex and the regulators who enforce them are fallible. Pressures and incentives can shape the judgments of regulatory employees just as they shape the judgments of executives. The agency investigating Fannie, OFHEO, is still scarred from the whipping it received for missing the Freddie Mac debacle, and Congress is perpetually threatening to move its regulatory responsibility elsewhere. Does this explain OFHEO's harshness? Who knows. But there is no better way to address a reputation for weakness and ineptitude than to start throwing charges around.
Practically no company is safe from a determined, powerful government opponent. OFHEO has concluded that Fannie manipulated earnings. Well, every company manipulates earnings (the polite word is "manages")—the only question is to what degree. OFHEO has concluded that Fannie established a "cookie jar" of reserves. Well, every company establishes reserves—the only time investors usually hear about them is when they run out. OFHEO has concluded that "If other companies used Fannie Mae's logic in applying accounting principles … there would be no comparability of financial results … even within the same industry." Well, every company makes different accounting choices, and there is often little comparability of companies in the same industry. These findings by themselves are not evidence of dishonesty. They are evidence that Fannie—and Raines—operate in the real world.
Business, like politics, is about compromise. Every dollar of profit is a dollar that could have been given to a customer through a price discount or paid to a vendor or employee. The popular perception of accounting rules is that they are binary: yes or no, right or wrong. In fact, accounting is often open to as wide a range of interpretation as interior decorating. One of the two rules that OFHEO has accused Fannie of violating, for example, is so complicated that a manual describing how to apply it is hundreds of pages long. If Raines and Fannie had to answer only to OFHEO, perhaps they would account for their derivative portfolio differently. But they also have to answer to Fannie's shareholders, customers, and employees.
Given Raines' track record, it seems unlikely that, as OFHEO argues, Fannie "pervasively and willfully" misapplied accounting rules. It's possible, of course, but another scenario seems more likely: Raines and the company believed that their choices were ethical, and the alleged wrongdoing is a matter of interpretation.
True to character, Raines has taken responsibility for Fannie's decisions, and, true to character, if the SEC decides that those decisions were intentionally improper, he will probably fall on his sword. In the meantime, he deserves the benefit of the doubt.
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