Funny business at Fannie Mae: how'd those Clintonites get so rich?

National Review, June 19, 2006 by Byron York

   By now every one of you must have 6.46
   branded in your brains. You must be able
   to say it in your sleep, you must be able to
   recite it forwards and backwards, you
   must have a raging fire in your belly that
   burns away all doubts, you must live,
   breathe and dream 6.46, you must be
   obsessed on 6.46.... After all, thanks to
   Frank, we all have a lot of money riding
   on it.... We must do this with a fiery
   determination, not on some days, not on
   most days but day in and day out, give it
   your best, not 50%, not 75%, not 100%,
   but 150%. Remember, Frank has given
   us an opportunity to earn not just our
   salaries, benefits, raises ... but substantially
   over and above if we make 6.46.

   So it is our moral obligation to give well
   above our 100% and if we do this, we
   would have made tangible contributions
   to Frank's goals.

It worked. Fannie Mae met its EPS goals, and Raines rewarded his top executives--and most of all himself--with unheard-of amounts of money.

Even though his salary never topped $1 million, Raines' total compensation shot from $6.48 million in 1998 to $8.52 million in 1999, to $13.89 million in 2000, to $18.86 million in 2001, to $18.20 million in 2002, to $24.15 million in 2003, all on the strength of EPS bonuses. Investigators found that of the $90.12 million Raines was paid in that six-year period, more than $52 million came from EPS bonuses.

Gorelick's situation was similar. OFHEO found that she took home $26.46 million in the period from 1998 to 2002 (she left in that year, so she wasn't there for the entire period under investigation). Of that figure, nearly $15 million came from EPS bonuses.

Of course, it wasn't legit. "Fannie Mae reported extremely smooth profit growth and hit announced targets for earnings per share precisely each quarter," the OFHEO report says. "Those achievements were illusions deliberately and systematically by the Justice Department, and will likely be in trouble with the Securities and Exchange Commission, too. And there probably won't be much more talk about Gorelick as attorney general should a Democrat win the White House in 2008.

But there still is the matter of cleaning up Fannie Mae. Senator Sununu and his colleagues on the Senate banking committee have been trying for two years to win approval of a bill that would create a new regulatory body for Fannie Mae and give that body the authority to crack down on the company's riskier practices.

But the bill has faced a lot of opposition, mostly from Democrats. When Raines was still at Fannie Mae (he was forced out in 2004), he tried, in Sununu's words, "to slow-walk the process. Frank Raines decided they were stronger and better and smarter than everyone else, so they would push back." Democrats allied themselves with Raines and said they created by [Fannie Mae's] senior management with the aid of inappropriate accounting and improper earnings management."

In other words, they cooked the books. And to make matters worse, according to OFHEO, when regulators began to catch on to what was happening, Raines and his team then "sought to interfere" with the OFHEO investigation by trying to get Congress to start up a separate probe of OFHEO. Fannie Mae also lobbied Congress to cut OFHEO's funds unless it got rid of the top official in charge of investigating Fannie Mae.