Don't blame Franklin Raines for the Fannie Mae scandal.

Taking stock of people and ideas in the news.
Oct. 7 2004 5:57 PM

Fannie Mae CEO Franklin Raines

Don't blame him for the mortgage giant's scandal … yet.

Illustration by Charlie Powell

Illustration by Charlie Powell.

On Wednesday, when Fannie Mae CEO Franklin Raines appeared before a House subcommittee to address allegations that he and his finance team had cooked the mortgage giant's books, he had three choices: One, he could do what other CEOs have done—take the Fifth (a prudent legal tactic, even for the innocent, albeit wimpy and unsatisfying). Two, he could claim he was shocked to discover that his finance department was staffed by hoodlums (also typical, even less admirable). Three, he could stand behind the accounting, his team, and his company, explain the decisions, and suggest that the allegations were wrong.

Raines chose option No. 3, which increased his personal risk and raised a for-now unanswerable question: Is he the perpetrator of an accounting crime, the target of a political witch hunt, or the victim of an overzealous bureaucracy?

Advertisement

The subcommittee collared Raines after Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight (or OFHEO), published a 211-page diatribe citing a litany of sins: "pervasive and willful" earnings manipulation, lax controls, perverse incentives, unjust bonuses. The press pounced, likening Fannie Mae to Enron, calling for Raines' head. The Securities and Exchange Commission launched an inquiry, the Justice Department a criminal investigation.

After years of scandals, such proceedings would hardly merit mention, except that Fannie Mae is no ordinary company and Raines no ordinary CEO. Created during the Depression to promote mortgage issuance and home ownership, Fannie is now, by one measure, the fourth-largest company in the country. It is also a "government-sponsored enterprise," and, as such, enjoys special privileges that most companies don't have. (Read more about this in " Moneybox".) This cushy status antagonizes Fannie's competitors, who argue, probably justifiably, that the advantage is unfair. Fannie doesn't help matters by paying its executives fat bonuses and hiding behind the universal appeal of its mission, declaring itself "in the American Dream business," and bludgeoning critics as "anti-housing."

If Fannie is in the American Dream business, Raines is the American Dream (until a few weeks ago, anyway). He grew up in Seattle, in a household of seven children. When his father lost his job, the 8-year-old Raines worked in a grocery store for $2 a week, and his mother scrubbed bathrooms at Boeing (three decades later, Raines was elected to Boeing's board).

Raines told the Seattle Post-Intelligencer that his parents provided "an example of people who worked for everything they got, every day meeting their responsibilities." He has, to put it mildly, continued the family tradition. In high school, Raines was student-body president, quarterback, and state debate champion. Between Harvard and Harvard Law, he attended Oxford as a Rhodes scholar. Professionally, he glided between government and the private sector, working for Nixon, Carter, and Clinton, becoming a partner at Lazard Freres and a vice chairman of Fannie Mae. Described as the Jackie Robinson of business, Raines' acceptance of Fannie's top slot in 1999 made him the first black CEO of a Fortune 500 company. He was mentioned as a possible vice presidential choice for John Kerry and a candidate for treasury secretary.

As Clinton's budget director, Raines negotiated the first balanced budget the government had approved in nearly 30 years. He accomplished this by doing what he has done since grade school: finding common ground. At Harvard, in an age of bitter divisiveness, Raines joined both the Young Democrats and the Young Republicans. This suggests a Clintonian desire to have it all ways, but also a mature pragmatism and a genuine eagerness to bridge divides. Twenty years later, in Washington, D.C., as he worked toward a budget compromise, Raines visited representatives from both parties, listening carefully, figuring out what each constituency wanted. After the budget deal, he became known as the best negotiator in town.

Raines emerged as a reassuring corporate face early in the wave of business scandals. As chairman of the Corporate Governance Task Force of the Business Roundtable, he spoke eloquently and intelligently about the lessons of Enron. When an accounting flamethrower torched sibling mortgage-giant Freddie Mac last summer—and Fannie felt the heat—Raines didn't hide. He didn't declare that Fannie was different. Instead, he carefully, patiently, explained why it was different. Asked whether Fannie had circumvented accounting rules or made accounting judgments that employees or auditors considered debatable, Raines replied unequivocally, "No" (a statement that the Justice Department will presumably hang him on if it determines the company did something wrong). Then, just as relevantly, he added:

I have seen a number of these sort of scandal fests before, where the issues become of vital importance that were not of any importance previously. Some people seem to be of the belief that if you manage your company with an eye to the accounting results, that that is somehow a suspicious activity. I don't know of any company that is not managed with an eye to what the accounting is going to say at the end of the period. So let's be very clear, every company undertakes business decisions with a view to, is this going to be recorded as a profit or a loss? That is a normal part of business.

I hope we don't get to the position where someone says, have you ever thought about two alternatives, one of which would have a more favorable impact on you and the other would have a less favorable; that somehow that is suspicious. It is not suspicious. It is the normal course of conducting a business, any business, not just a business like Fannie Mae.

But as Raines could have predicted, what looked like normal accounting a few months ago is now being viewed as a suspicious. The press and public are quick to accept the findings of regulatory investigations as gospel. In Wednesday's hearing, Rep. Richard Baker, R-La., declared Fannie's accounting practices "abhorrent." Few who read the newspapers probably imagine that they could have been otherwise.

TODAY IN SLATE

Politics

The Right to Run

If you can vote, you should be able to run for public office—any office.

Move Aside, Oxford Comma, the New Battle Is Over Single or Double Quotes

Renée Zellweger’s New Face Is Too Real

Sleater-Kinney Was Once America’s Best Rock Band

Can it be again?

Ben Bradlee’s Fascinating Relationship With JFK

Culturebox

The Simpsons World App Is Finally Here

I feel like a kid in some kind of store.

Technology

Driving in Circles

The autonomous Google car may never actually happen.

My Father Invented Social Networking at a Girls’ Reform School in the 1930s

How Punctual Are Germans?

  News & Politics
Politics
Oct. 22 2014 11:06 AM The Right to Run If you can vote, you should be able to run for public office—any office.
  Business
Moneybox
Oct. 21 2014 5:57 PM Soda and Fries Have Lost Their Charm for Both Consumers and Investors
  Life
Outward
Oct. 22 2014 10:37 AM Judge Upholds Puerto Rico’s Gay Marriage Ban in a Comically Inane Opinion
  Double X
The XX Factor
Oct. 22 2014 10:00 AM On the Internet, Men Are Called Names. Women Are Stalked and Sexually Harassed.
  Slate Plus
Working
Oct. 22 2014 6:00 AM Why It’s OK to Ask People What They Do David Plotz talks to two junior staffers about the lessons of Working.
  Arts
Behold
Oct. 22 2014 11:04 AM Do All U.S. Presidents Look the Same? What About Japan’s Prime Ministers?
  Technology
Technology
Oct. 22 2014 10:29 AM Apple TV Could Still Work Here’s how Apple can fix its living-room product.
  Health & Science
Science
Oct. 22 2014 11:23 AM “I’m Not a Scientist” Is a Dangerous Cop-Out Politicians brag about their ignorance while making ignorant decisions.
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.