Oops! Looks like my first link didn't work. So I'm just going to paste the article here: (it's from seattlepi.com, and is dated October 29, 2004).
Fannie Mae fallout could be huge
Scandal could drive up mortgage prices and cost Raines his job
By JAMES L. TYSON AND MONEE FIELDS-WHITE
In September 2003, Treasury Secretary John Snow urged Congress to get tough with Fannie Mae, the giant mortgage company run by former Seattleite Franklin Raines.
Snow said lawmakers needed to create a strong federal regulator to scrutinize Fannie Mae, which controls almost $1 trillion of home mortgages.
Raines, Fannie Mae's chief executive officer, said he welcomed the idea.
"Fannie Mae looks forward to working with Congress and the administration to see the proposal enacted into law this year," Raines told the House Financial Services Committee.
But behind the scenes, Fannie Mae's Chicago office mobilized to gut Snow's plan.
"Hi everyone -- We are reaching out for your help!!" the office wrote to mortgage bankers in an Oct. 6 e-mail. The note urged recipients to tell congressional leaders to keep their hands off Fannie Mae. Within days, the initiative died.
That's the kind of clout Fannie Mae has wielded to thwart those who would bridle it. Now Raines, 55, confronts an accounting scandal that has thrust his company into the sights of regulators, Congress and the Treasury.
A Harvard-educated Rhodes scholar and former budget director under President Clinton, Raines is struggling to contain the damage -- and preserve his job.
If Fannie Mae falters, the impact may speed a rise in home mortgage rates, threaten the housing market and end an era of rapid earnings growth for investors who own $66.6 billion of Fannie Mae stock.
The Washington-based Office of Federal Housing Enterprise Oversight, which monitors Fannie Mae and its smaller cousin, Freddie Mac, has accused Raines' company of accounting abuses that enriched executives -- among them Raines, who earned $20 million in 2003.
Fannie Mae used hidden "cookie jar" reserves to smooth out reported earnings, the oversight office said in a Sept. 17 report. Fannie Mae improperly deferred $200 million of estimated expenses in 1998 and executed a plan to record those expenses in subsequent years, the regulator said.
The move violated generally accepted accounting principles and enabled Raines and other top executives to collect a combined $27.1 million in bonuses, the regulator says.
Testifying before a House panel that oversees financial services on Oct. 6, Raines said Fannie Mae had done nothing wrong. "I have always tried my best to ensure our company does the right thing in the right way," Raines said. "And I believe to this day that we did."
The most difficult thing, Raines said, was explaining the controversy to his three daughters. "That's hard," he said, his voice cracking.
The regulator's report has unleashed a storm in Congress and prompted the Justice Department to open a criminal investigation. The Securities and Exchange Commission is conducting its own inquiry, as is Ohio Attorney General James Petro.
Whether Fannie Mae deliberately broke accounting rules, as the oversight office has argued, or reasonably interpreted complex standards, as Raines has maintained, the fracas may upend the company's executive suite, said David Dreman, chairman of Dreman Value Management LLC.
"Top management of Fannie Mae cannot survive this," said Peter Wallison, White House counsel for President Reagan and now a fellow at the Washington-based American Enterprise Institute.
Fannie Mae's days of galloping growth may be over, said Orin Kramer, chairman of the New Jersey Investment Council, which runs the state's $68 billion pension system.
The reverberations may ripple through the housing market, said Lawrence White, a Freddie Mac director from 1986 to 1989. The chastening of Fannie Mae may ultimately drive up mortgage rates by a quarter of a percentage point, White said.
Fannie Mae stock stumbled after the oversight office went public with its report on Sept. 22, falling 9.8 percent through Oct. 12; the shares closed yesterday at $70.25.
The fallout in the financial markets may have only just begun, said Dreman, who manages $11 billion. "There could be an awful lot of damage; it could be a Pandora's box that we have here," he said.
Since Raines became CEO on Jan. 1, 1999, Fannie Mae's earnings have grown at an unprecedented average annual rate of 18 percent. That performance was fueled by a housing boom that has lifted real home prices 36 percent since 1995, according to the Federal Reserve Bank of New York.
The company's assets ballooned to $1.01 trillion in 2003 from $575.17 billion in 1999.
Friends and allies have sprung to Raines' defense, saying the regulatory allegations are politically motivated. "This hearing is about the political lynching of Franklin Raines," Rep. William Clay, D-Mo., told the House committee on Oct. 6.
Steve Pruzan, a Seattle lawyer who has known Raines since high school, said that he talked to the executive after his testimony and that Raines was holding up. "I know Frank as well as any human being can know anyone, and for these accusations to be out there, it's very upsetting," Pruzan said.
Raines and other Fannie Mae executives declined to be interviewed.
The maelstrom has emboldened foes in the corporate world and in the Bush administration who say Fannie Mae's and Freddie Mac's special status as so-called government-sponsored enterprises gives them unfair advantages over big banks and mortgage lenders.
"The recent Fannie revelations have caused us to push even harder," said Michael House, executive director of FM Policy Focus, a Washington-based lobbying group that is funded by rivals of Fannie Mae and Freddie Mac. "I don't care whether you're a child or a large financial institution -- if you are not properly regulated and disciplined, you are going to get out of hand."
Wayne Abernathy, assistant Treasury secretary for financial institutions, said Fannie Mae and Freddie Mac need to be watched closely to avoid disruptions in the mortgage market. "We don't think there is adequate supervision to ensure that now," he said.