Fannie Mae on Tuesday ousted its chief executive, Franklin Raines, and its chief financial officer, Timothy Howard, holding them accountable for a financial restatement that could lower the mortgage finance giant’s earnings by an estimated $9bn.
In a statement, Mr Raines said he was “retiring” from the company, and added: “By my early retirement, I have held myself accountable.”
The executives were expected to be temporarily replaced by a new management team. Daniel Mudd, Fannie’s chief operating officer, will be acting CEO; Robert Levin, executive vice-president, becomes acting CFO.
Fannie also severed ties with its auditor, KPMG, which has acted as the company’s accountant since 1969.
The move by the board came after the Securities and Exchange Commission’s chief accountant found that Fannie had not correctly applied accounting rules related to the hedging of its derivatives, and advised the company to restate its earnings.
In a sign of Mr Raines’s high standing at Fannie, the board has taken a week to come to the decision to get rid of him.
His ousting marks the ignominious end to a glittering career. From humble beginnings in Seattle, Mr Raines won a scholarship to Harvard, and was also a Rhodes Scholar at Oxford before working on Wall Street for more than a decade with Lazard Freres.
Before becoming chief executive of Fannie in 1999, he was a member of President Bill Clinton’s cabinet and director of the Office of Management and Budget.
Mr Raines’s intellect was highly regarded at Fannie, which manages a $891bn portfolio of mortgages. But he was also perceived to be arrogant, often boasting about the company’s “best in class” financial practices and corporate governance standards, and his knowledge of its business.
“It is my duty to ensure that I know how Fannie Mae earns its income and what risks we are taking in the course of our business,” he told the company’s annual shareholders meeting last year.
Mr Raines maintained this attitude even after Fannie’s regulator, the Office of Federal Housing Enterprise Oversight, released a 211-page report in September alleging the company was violating accounting rules related to the hedging of its derivatives, which it uses to manage the risk of its mortgage portfolio. His refusal to acknowledge that the company may have made mistakes at a Congressional hearing in October antagonised lawmakers.
On Tuesday, Congressman Richard Baker, chairman of the House sub-committee that convened the hearings, commended the board’s decision to fire Mr Raines and Mr Howard. “Given the unbelieveable statements Fannie executives made at our last hearing, this action was entirely necessary.”
Fannie remains under investigation by the Department of Justice and the SEC.