Suggesting that crime does pay, the architects of the humongous fraud at Fannie Mae are claiming their rights to millions of compensation wrongfully paid to them as a result to their fraud. Three cheers for the Washington Post for taking them on in the following commentary:
washingtonpost.com Accountability Pays
Monday, January 3, 2005; Page A12
"BY MY EARLY retirement, I have held myself accountable." So said Franklin D. Raines when he stepped down almost two weeks ago as chairman and chief executive of mortgage giant Fannie Mae. Mr. Raines leaves the company facing a criminal investigation by the Justice Department and a civil investigation by the Securities and Exchange Commission, whose chief accountant last month told the government-sponsored company that it had improperly twisted accounting rules. As a result, Fannie Mae might have to report $9 billion in previously unrecorded losses, wiping out 38 percent of its profits since 2001. There is also a continuing investigation by its chief regulator, the Office of Federal Housing Enterprise Oversight, which accused the company of "pervasive and willful" accounting violations and has declared it "significantly undercapitalized."
A bit of accountability -- indeed, even a dollop of contrition -- might seem to be in order for Mr. Raines and Fannie Mae's longtime chief financial officer, J. Timothy Howard, who resigned the same day. In his statement the SEC's top accountant said that the company, rather than adhering to accounting rules with which it disagreed, "internally developed its own unique methodology." In much the same way, Messrs. Raines and Howard seem to have developed their own unique notion of accountability, in which being accountable means not having to relinquish a single penny that they might be entitled to under their platinum parachute severance packages.%
It's not as if they weren't compensated lavishly during their time at Fannie Mae -- in part as a result of the accounting rules that regulators say they misapplied. Mr. Raines's compensation in 2003 totaled about $20 million, including $3 million in stock options; Mr. Howard received $7.6 million, including $2.3 million in options. Mr. Raines's early retirement and Mr. Howard's resignation then entitled them to equally lavish severance packages: Mr. Raines gets a yearly pension of at least $1.3 million; Mr. Howard's pension would be $433,000. Moreover, Mr. Raines, his wife and dependent children get free health insurance for life, and the company pays the premiums on a life insurance policy for Mr. Raines worth at least $2.5 million.
But that may not be all. Mr. Howard says that he's actually entitled to be paid through June 2007, which would give him $1.7 million more, not to mention continuing medical and dental coverage. Meanwhile, Mr. Raines contends that his retirement isn't effective for six months, which would cost him in the short term (his pension is more generous than his base salary) but bump up his pension by $23,000 a year in the long term. Moreover, Mr. Raines says he may be entitled to additional stock options. This may be more tactical angling for legal advantage than an effort to grab even more money, but that doesn't make it any more attractive.
The Office of Federal Housing Enterprise Oversight says it's reviewing the departure packages, though current rules may not give it the clout to undo such payments. If so, that, too, should be among the changes lawmakers consider in beefing up regulation of this financial giant.
© 2005 The Washington Post Company