Raines’ Fall Is a Surprise to Many Who Knew Him

If what goes up must come down, then maybe it was inevitable that Franklin D. Raines’ rise through the worlds of business and politics would end.

But few who know the soft-spoken businessman envisioned the abrupt landing Raines made days before Christmas when he resigned under pressure as Fannie Mae’s chairman and chief executive in the midst of an accounting scandal at the nation’s largest mortgage lender.

“He’s a guy who operates with a great deal of integrity,” said Leon Panetta, who was chief of staff in the Clinton White House when Raines headed the budget office. “I can’t imagine that he would try to play games with something that important.”

Raines’ ouster, just two months after he swore to Congress that Fannie Mae’s accounting practices were beyond reproach, could be a career ender for someone who all his life excelled in academia and on Wall Street, in government and politics.

In 1999, Raines became the first black CEO of a Fortune 500 company when he took over at Fannie Mae. This year he was mentioned as a candidate for Treasury secretary in a Democratic administration.

“I previously stated that I would hold myself accountable if the [Securities and Exchange Commission] determined that significant mistakes were made in the company’s accounting,” Raines said Dec. 21 in his final statement as head of Fannie Mae. “By my early retirement, I have held myself accountable.”

Besides losing his job, Raines faces hefty legal bills and a possible fight over his pension.

Fannie Mae’s accounting practices remain under investigation by its regulator, the Office of Federal Housing Enterprise Oversight, the Justice Department and the SEC. There are shareholder lawsuits too, and an independent review ordered by the company’s board of directors.

Raines, who turns 56 on Jan. 14, is due a lifetime pension of more than $1.3 million a year. But regulators have asked Fannie Mae to delay payment until they can decide whether the company acted appropriately by letting him retire early instead of firing him.

Through his attorney, Raines declined a request for an interview.

Friends say Raines could have fought to keep his job, but he decided to leave because of a previous pledge to take responsibility if accounting problems were found.

Securities regulators said this month that the company had violated accounting rules and would have to restate its earnings, possibly erasing about $9 billion in past profit. The findings came after Fannie Mae’s regulator cited it for serious accounting problems and accused it of manipulating earnings.

Raines, who earned $20 million in salary and bonuses last year, is disappointed and concerned about his family, his friends say, but coping.

“His star has always risen. It’s never gone anywhere but up,” said Steven Pruzan, a Seattle attorney who became friends with Raines when they were paired on the debating team their first day of high school. “I think the thing that bothered him the most was his daughters and what they were hearing.”

Raines and his wife, Wendy, have three daughters whom he often drove to their private school near Fannie Mae headquarters. When he testified before Congress in October, his voice broke when he talked about the difficulty of explaining the situation to them.

Some blame politics for Raines’ misfortune.

In a city controlled by Republicans, he was a visible Democratic holdover from the previous administration, running a major quasi-government corporation. And for some time, the banking industry, a traditionally Republican constituency, has wanted a larger share of the mortgage market dominated by Fannie Mae, which finances 1 of every 5 mortgage loans in the country. The opportunity for the industry to get its wish brightened after President Bush won a second term.

“I expected that the politics would eventually force him out,” said Ron Walters, a longtime political observer who teaches at the University of Maryland.

Fannie Mae may be forced to take steps to deal with what its regulator said was a “significantly undercapitalized” balance sheet, meaning the company might not have enough money to cover potential losses. Fannie Mae is second in size only to Citigroup Inc.

Overseers also have raised questions about some $245 million in bonuses paid to executives since 2001.

Fannie Mae’s accounting came under closer scrutiny after Freddie Mac, its smaller rival in the mortgage market, disclosed in June 2003 that it had understated profit by as much as $4.5 billion. Several top Freddie Mac executives were ousted as a result.

From a modest beginning in Seattle, where at age 8 he went to work in a grocery store to help his family, Franklin Delano Raines seemed headed for success.

He was captain of the high school football team, student body president and state debate champion. He earned an undergraduate degree from Harvard and then won a Rhodes scholarship to study at Oxford University in England, followed by a Harvard law degree.

Raines worked in the Carter administration after law school before becoming a partner at Wall Street investment bank Lazard Freres, where he stayed through the early 1990s.

He had a previous stint at Fannie Mae, as vice chairman, beginning in 1991. Five years later, President Clinton put Raines in charge of the White House budget office, where he helped negotiate Clinton’s budget-balancing deal with Congress.

Given his past, friends don’t expect Raines to stay down for long.

In the interim, he could focus on the city’s new baseball team. Raines is a member of a group of community and business leaders -- including Fannie Mae board member Fred Malek -- who are working to bring baseball back to Washington.

“I would be shocked if he didn’t get another job and wasn’t doing something important and worthwhile,” Pruzan said. “He’s made many, many friends and has lots of people in good places. He’ll land on his feet in the end here.”