Franklin Raines

Franklin Delano Raines
31st Director of the Office of Management and Budget
In office September 13, 1996 – May 21, 1998
President	Bill Clinton
Preceded by	Alice M. Rivlin
Succeeded by	Jacob J. Lew
Personal details
Born	(1949-01-14) January 14, 1949 Seattle, Washington
Political party	Democratic
Alma mater	Harvard College, Harvard Law School, Magdalen College, Oxford, University of Oxford

Franklin Delano "Frank" Raines (born January 14, 1949) is an American business executive. He is the former chairman and chief executive officer of the Federal National Mortgage Association, commonly known as Fannie Mae, who served as White House budget director under President Bill Clinton. His role leading Fannie Mae has come under scrutiny.

Early life

Raines was born in Seattle, Washington, the son of a janitor. Raines graduated from Harvard College, Harvard Law School; and Magdalen College, Oxford University as a Rhodes Scholar.

Career

In 1969, Raines first worked in national politics, preparing a report for the Nixon administration on the causes and patterns of youth unrest around the country related to the Vietnam War. He served in the Carter Administration as associate director for economics and government in the Office of Management and Budget and assistant director of the White House Domestic Policy Staff from 1977 to 1979. Then he joined Lazard Freres and Co., where he worked for 11 years and became a general partner. In 1991 he became Fannie's Mae's Vice Chairman, a post he left in 1996 in order to join the Clinton Administration as the Director of the U.S. Office of Management and Budget, where he served until 1998. In 1999, he returned to Fannie Mae as CEO, "the first black man to head a Fortune 500 company."

On December 21, 2004 Raines accepted what he called "early retirement" from his position as CEO while U.S. Securities and Exchange Commission investigators continued to investigate alleged accounting irregularities. He is accused by The Office of Federal Housing Enterprise Oversight (OFHEO), the regulating body of Fannie Mae, of abetting widespread accounting errors, which included the shifting of losses so senior executives, such as himself, could earn large bonuses.

In 2006, the OFHEO announced a suit against Raines in order to recover some or all of the $90 million in payments made to Raines based on the overstated earnings, initially estimated to be $9 billion but have been announced as 6.3 billion.

Civil charges were filed against Raines and two other former executives by the OFHEO in which the OFHEO sought $110 million in penalties and $115 million in returned bonuses from the three accused. On April 18, 2008, the government announced a settlement with Raines together with J. Timothy Howard, Fannie's former chief financial officer, and Leanne G. Spencer, Fannie's former controller. The three executives agreed to pay fines totaling about $3 million, which will be paid by Fannie's insurance policies. Raines also agreed to donate the proceeds from the sale of $1.8 million of his Fannie stock and to give up stock options, which were valued at $15.6 million when issued. The stock options however had no value. Raines also gave up an estimated $5.3 million of "other benefits" said to be related to his pension and forgone bonuses.

An editorial in The Wall Street Journal called it a "paltry settlement" which allowed Raines and the other two executives to "keep the bulk of their riches." In 2003 alone, Raines's compensation was over $20 million.

A statement issued by Raines said of the consent order, "is consistent with my acceptance of accountability as the leader of Fannie Mae and with my strong denial of the allegations made against me by OFHEO."

In a settlement with OFHEO and the Securities and Exchange Commission, Fannie paid a record $400 million civil fine. Fannie, which is the largest American financier and guarantor of home mortgages, also agreed to make changes in its corporate culture and accounting procedures and ways of managing risk.

In June 2008 The Wall Street Journal reported that Franklin Raines was one of several public officials who received below market rates loans at Countrywide Financial because the corporation considered the officeholders "FOA's"--"Friends of Angelo" (Countrywide Chief Executive Angelo Mozilo). He received loans for over $3 million while CEO of Fannie Mae.

Role in the subprime mortgage crisis

See also: Subprime mortgage crisis

Whether the GSEs caused or greatly contributed to the financial crisis of 2008 is controversial. A few try to minimize their role. The Financial Crisis Inquiry Commission (FCIC) completed its analysis of the financial crisis and found that the GSE's "contributed to the crisis, but were not a primary cause." (That was only the majority report, and there was strong dissent.) The FCIC found that the GSE's were late to the subprime lending game, entering the market in a substantial way in 2005. The GSE's followed rather than lead the race to purchase subprime loan securities. The GSE's increased their involvement in the subprime securitization market because they were significantly losing market share and were feeling less relevant in the mortgage lending marketplace. In accordance with the mission of Fannie Mae to enable home ownership by a greater proportion of the population, Franklin Raines, while Chairman and CEO, began a pilot program in 1999 to issue bank loans to individuals with low to moderate income, and to ease credit requirements on loans that Fannie Mae purchased from banks. Raines promoted the program saying that it would allow consumers who were "a notch below what our current underwriting has required" to get home loans. The move was intended in part to increase the number of minority and low income home owners.

The Investor's Business Daily editorial staff has noted that the expansion of easy credit to home buyers with a lesser ability to pay them back was one of the major contributing factors to the subprime mortgage crisis.

While the Fannie Mae pilot program described above sought to expand housing opportunities for under-served consumers, these loans did not result in major losses and performed significantly better than private label subprime loans. Phil Angelides, the Chair of the FCIC commented that ". . .the FCIC analyzed the performance of roughly 25 million mortgages outstanding at the end of each year from 2006 to 2009, and found that delinquency rates for the loans that Fannie Mae and Freddie Mac purchased or guaranteed were substantially lower than for mortgages securitized by other financial firms. This holds true even for loans to borrowers with similar credit scores or down payments. For example, data compiled by the FCIC for a subset of borrowers with scores below 660 shows that by the end of 2008, far fewer GSE mortgages were seriously delinquent than non-GSE securitized mortgages: 6.2 percent versus 28.3 percent." Although under Raines, Fannie Mae invested in some securities backed by subprime loans, it didn't start buying subprime and Alt-A loans directly (and bundling them into securities) until late 2004 after the accounting scandal. Purchasing of subprime and alt-A mortgages expanded under the guidance of Raines's successor Daniel H. Mudd. (See also Subprime lending.)

On December 9, 2008, Raines testified before the United States House Committee on Oversight and Government Reform on Capitol Hill regarding Fannie Mae, Freddie Mac, and financial market instability.

Question of Raines and Obama connection

On 16 July 2008 The Washington Post reported that Franklin Raines had "taken calls from Barack Obama's presidential campaign seeking his advice on mortgage and housing policy matters.". Also, in an editorial on August 27, 2008 titled "Tough Decision Coming", the Washington Post editorial staff wrote that "Two members of Mr. Obama's political circle, James A. Johnson and Franklin D. Raines, are former chief executives of Fannie Mae." On September 18, 2008, John McCain's campaign published a campaign ad that quoted the Washington Post reporting regarding Raines and Obama. The ad also notes that "Raines made millions and then left Fannie Mae while it was under investigation for accounting irregularities".

Neither Raines nor the Obama campaign had disputed the Post's reporting before the ad. The text in question consisted of one sentence in each article. After McCain's attack ad however, both denied that Raines was or had been a provider of advice to Obama or the Obama campaign.

In later commentary the Washington Post (the original source) described McCain's attempts to connect Obama with Franklin Raines based on their reporting as "a stretch" and said all reporting they did about the matter actually stems from a single conversation a reporter had with Raines in which she recalls Raines said he "had gotten a couple of calls from the Obama campaign". When the reporter queried Raines to the nature of the calls he said "oh, general housing, economy issues".

Additionally, an email hoax falsely claims Raines was made "Chief Economic Advisor" for the Obama presidential campaign.

External links

• OFHEO Director Testimony before US Senate - Franklin Raines conduct as Fannie Mae CEO
• Video Interviews - Franklin Raines With Stephen Shepard
• Article by Henry Blodget of Slate Magazine Defending Franklin Raines - October 7, 2004