Fannie Mae's board of directors took almost a week to decide whether a $9bn earnings restatement was enough to undermine the standing of Franklin Raines and Timothy Howard, the US mortgage giant's chief executive and chief financial officer respectively. Mr Raines has been allowed to “retire”, while Mr Howard has “resigned”. It will be interesting to see if the two hand back any of the combined $46m in bonuses and incentive pay they took home over the past three years.
For Fannie's shareholders and bondholders, there are larger questions. One is how the company's government-sponsored enterprise status will change. Fannie Mae's accounting errors have left it under-capitalised, according to its regulator, Ofheo. It faces investigations by the Securities and Exchange Commission and the Justice Department. Inevitably, shareholders have filed lawsuits. All this strengthens the case for reform. Mr Raines resisted proposals calling for tighter regulation, for example, by limiting the rate at which it could buy new mortgages. With Fannie Mae's reputation tarnished, such changes are a real possibility. Ofheo could also insist that the temporary increase in Fannie Mae's minimum capital, which it has imposed, becomes permanent.
Stronger regulation would stunt Fannie Mae's growth. That should worry shareholders. Bondholders, on the other hand, would still benefit from the triple-A debt rating associated with the company's GSE status. Of course, any move to prise Fannie Mae away from the government could hurt debt holders. However, the privatisation of Fannie Mae and its mortgage market sibling, Freddie Mac, still seems to be a step too far, for now. The immediate need is for a revamp of Fannie Mae's governance, accounting and credibility. The exit of Messrs Raines and Howard does not preclude finding other skeletons in the cupboard. Investors might justifiably hope Fannie Mae's board will now show greater alacrity with the rest of its house-cleaning.