Domestic dispute: Fannie Mae is doing better than ever, but the man behind the "American Dream" faces tough criticism - Cover Story - Statistical Data Included - Company Profile

Chief Executive, The, May, 2002 by William H. Miller

The political savvy gained in his White House years helps Raines blunt the criticism. But the lean, 53-year-old CEO brings other attributes to the task. "He's low key, understated and thoughtful," comments Vincent Mai, a longtime Fannie board member who is chairman of AEA Investors, a New York investment firm. "He's not combative or confrontational. Because he knows the business so well and is respectful of other people, he's particularly effective in putting out Fannie Mae's story."

It helps, too, that Raines is an artful debater. His skills on his high school debate team, in fact, lifted him out of boyhood poverty in Seattle, winning him a scholarship to Harvard. There he earned undergraduate and law degrees, en route to becoming a Rhodes scholar. He worked for the Carter Administration in OMB and White House posts in the late 1970s, then logged 11 years as a general partner at Lazard Freres & Co., a Wall Street investment bank. He joined Fannie in his first stint as vice chairman in 1991.

Relaxing in his airy office in Fannie's campus of Georgian buildings on Washington's upper Wisconsin Avenue, Raines patiently rebuts the criticism.

On charges that Fannie isn't doing enough to help underserved homebuyers -- Confronting Raines is a well-publicized study by FM Watch, a vocal coalition of Fannie's competitors whose board includes the CEOs of such financial giants as Chase Manhattan, Wells Fargo and GE Capital. The study, based on Department of Housing & Urban Development data, asserts that from 1996 to 2000 Fannie Mae and Freddie Mac lagged banks and other mortgage originators by 30 percent in serving African-Americans, by 11 percent in serving Hispanics and by 24 percent in serving homebuyers earning below-median income.

Raines, throwing up his hands, disputes the study's methodology, pointing out that it includes "loans for the sub-prime market that we don't serve." He indicates that fully 51.6 percent of Fannie's 2001 financing went to low- and moderate-income households, topping HUD's goal of 50 percent. That compares with 25 percent when he initially joined the company in 1991.

Managing criticism from competitors

"Remember who our critics are," he says. "It's significant that criticism of us is not coming from affordable housing groups, governors or mayors.

On Fannie's debt, risk and transparency -- The company's debt-to-equity ratio, five times higher than the average of commercial banks, prompts FM Watch Executive Director Mike House to fume, "If Fannie Mae were to be regulated like a commercial bank, it would face serious risk of closure." The Wall Street Journal lately has been scathing. In a February editorial headlined, "Freddie Mac, Fannie Mae Seem More Volatile as Accounting Rule Highlights Hedging Risks," the newspaper strongly criticized the two companies' use of financial derivatives. The Bush Administration, in its 2003 budget document, warns that many people erroneously believe the federal government backs Fannie and Freddie, and falsely regard investments in the two as risk-free.