Politics and the Fannie Mae Piggy Bank
Franklin Raines, Jamie Gorelick, and some very cooked books.
Editor’s note — The impending federal bailout of Fannie Mae and Freddie Mac has shed light not only on the seriousness of current housing market conditions but also on the mismanagement and corruption that helped cripple the mortgage giants. Although political figures from both parties have profited mightily from Fannie Mae, it has been a particular favorite of former officials of Democratic administrations, as NR’s Byron York found out when he looked into the situation in the summer of 2006.
In 1999, Raines announced a new goal to double Fannie Mae’s EPS in five years, from $3.23 per share to $6.46. It was an audacious goal, and reaching it, according to OFHEO, became Fannie Mae’s reason for existence: “$6.46, the EPS goal, became the corporate mantra — everything else was secondary to hitting that target.” To convey an idea of just how obsessed Raines had become, and how he passed on that obsession to his top managers, the OFHEO report quotes at some length from a speech given in 2000 by Sampath Rajappa, head of the Office of Auditing, to his accounting team:
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’s 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.
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