Fed Settles $215 Million Claim Against Fannie Mae Chiefs
Federal housing authorities have reached a $31.4 million settlement with ousted Fannie Mae CEO and Harvard-educated Rhodes Scholar Franklin Raines and some of his former staff. The agreement follows allegations that Raines and his deputies inflated earnings reports while at the helm of largest mortgage-finance company in the nation. The deal settles $215 million lawsuit filed by Office of Federal Housing Enterprise Oversight (OFHEO) against the crew in late 2006 over an assessed $6.3 billion in misstatements issued by Fannie Mae, a government-chartered company.
Bloomberg reports that as part of the settlement deal, Raines has agreed to pay $24.7 million in fines and penalties and will forfeit stock options. But the buck doesn’t stop there. Former Fannie Mae CFO Timothy Howard will fork over $6.4 million, and former controller Leanne Spencer was fined $275,000. The penalties however, won’t be paid in full by Raines, Howard or Spencer. Fannie Mae’s insurance carrier will cover the $3 million cash portion of the settlement.
Raines himself will pay a $2 million fine to the federal government; relinquish claims on stock options valued at $15.6 million when they were issued; donate $1.8 million in proceeds from the sale of Fannie Mae stock to charitable programs that help struggling homeowners; and forfeit about $5.3 million in other benefits so far unspecified by OFHEO. He received the stock options in 2000-2003 for 932,000 shares at exercise prices ranging from $69.43 to $80.95 a share. After he was booted, the shares never rose above $72 and now trade at less than $30, rendering his relinquished options worthless on the market.
Insurance will cover Howard’s $750,000 fine, but he’ll give up $5.2 million in stock options, contribute $200,000 in proceeds from stock sales to charity and loose unspecified benefits valued at $240,000, OFHEO said.
Fannie Mae and Freddie Mac were created to boost homeownership. Their profits stem from holding mortgages and mortgage bonds as investments and by charging fees to guarantee and package the loans as securities. The government requires them to reserve capital to cover losses on those mortgages. The companies came under greater regulatory scrutiny in 2003, when accounting blunders first became painfully evident.
In a similar settlement deal, OFHEO documents show that former Freddie Mac CEO Leland Brendsel agreed in November to pay $16.4 million in penalties for his role in that company’s bogus accounting statements. Brendsel resigned under pressure from Freddie Mac in 2003, and on his way out agreed to pay a $2.5 million penalty, return $10.5 million in compensation and drop a claim to $3.4 million in additional earnings.
In the wake of the announcement, Fannie Mae climbed 30 cents to $28.55 Friday in NYSE composite trading, while Freddie Mac jumped 25 cents to $27.06. The two companies own or guarantee more than 40 percent of the $11.5 trillion in outstanding U.S. home loans.
Tags: bloomberg, Fannie Mae, Freddie Mac, Harvard, insurance, Leland Brendsel, NYSE, Office of Federal Housing Enterprise Oversight, OFHEO, Rhodes Scholar, stock options, struggling homeowners, Timothy Howard