Franklin Raines

Franklin Delano Raines
Born	(1949-01-14) January 14, 1949 Seattle, Washington, U.S.
Occupation(s)	Corporate executive, government official
Known for	Chairman and CEO of Fannie Mae; White House budget director under President Bill Clinton

Franklin Delano Raines (born January 14, 1949), commonly referred to as Frank Raines, is an American corporate leader who formerly held the positions of chairman and CEO at the Federal National Mortgage Association (Fannie Mae). He also served as the White House budget director during President Bill Clinton's administration. His tenure at Fannie Mae drew significant criticism, with Time magazine including him in its list of "25 People to Blame for the Financial Crisis."

Early life

Raines was born in Seattle, Washington to a janitor father. He completed his education at Harvard College, followed by Harvard Law School, and later attended Magdalen College, Oxford as a Rhodes Scholar.

Career

Raines entered the realm of national politics in 1969, initially covering youth protests related to the Vietnam War. Between 1977 and 1979, he worked in the Carter Administration as associate director for economics and government at the Office of Management and Budget and as assistant director of the White House Domestic Policy Staff. Subsequently, he spent over a decade at Lazard Freres and Co., eventually becoming a general partner. In 1991, he took on the role of vice chairman at Fannie Mae, departing in 1996 to serve as director of the U.S. Office of Management and Budget under President Clinton until 1998. He returned to Fannie Mae as CEO in 1999.

On December 21, 2004, Raines stepped down through an "early retirement" arrangement amid SEC inquiries into potential accounting misconduct at Fannie Mae. The Office of Federal Housing Enterprise Oversight (OFHEO) charged him with facilitating accounting practices that concealed losses to inflate earnings, thereby enabling substantial executive bonuses.

In 2006, OFHEO initiated legal action against Raines seeking recovery of some or all of $90 million paid based on inflated earnings figures, which were initially estimated at $9 billion but later adjusted to $6.3 billion. The civil lawsuit demanded $110 million in penalties and $115 million in bonus repayments from Raines along with two other former executives.

On April 18, 2008, a settlement agreement led to dismissal of charges against Raines. Although he denied any misconduct, he consented to pay approximately $3 million in fines covered by Fannie Mae’s insurance policy. Additionally, he agreed to donate proceeds from $1.8 million worth of newly issued stock and relinquished stock options originally valued at $15.6 million when granted (though these had no current value). The OFHEO reported that he also forfeited around $5.3 million in pension-related benefits and unearned bonuses; however, Raines contested that he paid no personal funds.

A Wall Street Journal editorial criticized the settlement as "paltry," noting that Raines retained most of his wealth despite having earned over $20 million in compensation during 2003 alone.

Raines characterized the consent order as an acceptance of responsibility while firmly rejecting OFHEO's allegations.

The OFHEO’s accusations were mirrored in a class action securities fraud lawsuit filed by the Ohio Attorney General on behalf of pension funds and investors. In 2012, Federal District Judge Richard Leon granted summary judgment dismissing Raines from this case due to insufficient evidence proving intentional violations of accounting standards or investor deception. The judge also questioned the reliability of OFHEO’s administrative reports.

Fannie Mae agreed to pay a historic $400 million civil penalty in settlements with OFHEO and the SEC, committing to implement reforms related to corporate governance, accounting practices, and risk oversight. Neither the SEC nor the Justice Department filed charges against Raines.

In June 2008, The Wall Street Journal reported that Raines may have received loans below market rates from Countrywide Financial through its "Friends of Angelo" program. While serving as Fannie Mae’s CEO, he obtained loans exceeding $3 million but denied receiving preferential treatment beyond what his creditworthiness justified.

Role in the Subprime Mortgage Crisis

The degree to which Government-Sponsored Enterprises (GSEs) influenced the 2008 financial meltdown continues to be a subject of debate. According to the Financial Crisis Inquiry Commission (FCIC), while GSEs played a role in the crisis, they were not among its main instigators. The commission noted that GSEs only significantly entered the subprime lending arena around 2005, following rather than spearheading the growth in subprime mortgage-backed securities. This heightened participation was largely a response to substantial losses in market share and a decline in their prominence within mortgage financing.

During Franklin Raines' tenure as CEO, Fannie Mae launched a pilot initiative in 1999 aimed at relaxing credit criteria to promote homeownership among minority and low-income groups. Raines underscored that this approach would permit borrowers who did not meet conventional underwriting benchmarks to obtain loans. This initiative was consistent with Fannie Mae’s mission to increase homeownership accessibility.

Investor's Business Daily pointed out that extending credit to borrowers with weaker credit profiles was a significant factor in the subprime crisis. Nonetheless, mortgages originating from Fannie Mae’s pilot program exhibited far better performance compared to private-label subprime loans. Phil Angelides, chair of the FCIC, highlighted that delinquency rates on mortgages guaranteed by GSEs were markedly lower than those securitized by other entities—even when comparing borrowers with similar credit scores—for instance, 6.2% delinquency for GSE-backed loans versus 28.3% for private-label loans among borrowers with credit scores below 660 at the end of 2008.

Although Fannie Mae purchased some securities backed by subprime loans during Raines’ leadership, it was only after his departure in 2006, under CEO Daniel H. Mudd, that the company began directly acquiring and securitizing subprime and Alt-A mortgages.

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

Alleged Connection to Obama

On July 16, 2008, The Washington Post reported that Franklin Raines had received calls from Barack Obama’s presidential campaign seeking guidance on mortgage and housing policies. An editorial published on August 27, 2008, noted that two individuals connected to Obama’s political network—James A. Johnson and Franklin D. Raines—had both served as former CEOs of Fannie Mae. On September 18, 2008, John McCain’s campaign aired an advertisement citing The Washington Post’s coverage of Raines and Obama, emphasizing that “Raines made millions and then left Fannie Mae while it was under investigation for accounting irregularities.”

Before this advertisement was released, neither Raines nor the Obama campaign contested the reports. Subsequently, both parties denied that Raines had provided any advisory services to Obama or his campaign.

Later analysis by The Washington Post characterized McCain’s effort to associate Obama with Raines as “a stretch,” noting that all accounts originated from a single exchange where Raines acknowledged he “had gotten a couple of calls from the Obama campaign” regarding broad housing and economic topics.

Furthermore, an erroneous email circulated falsely claiming that Raines had been appointed as “chief economic advisor” for Obama’s presidential bid.

See also

• Raines v. Byrd
• Raines' Rules

External links

• Testimony of OFHEO director before the U.S. Senate regarding Franklin Raines' leadership at Fannie Mae
• Video interview series featuring Franklin Raines with Stephen Shepard
• Henry Blodget’s Slate article offering a defense of Franklin Raines - October 7, 2004