WASHINGTON - Fannie Mae's chief regulator is reviewing whether the company paid too much in severance and bonuses to Chief Executive Officer Franklin Raines and Chief Financial Officer J. Timothy Howard, who were ousted this week because of accounting mistakes.
At stake for Raines, who led the biggest provider of mortgage financing in the United States, is as much as $30 million in stock and options and a $1 million-a-year pension. Howard's package includes about $13 million in stock and options and a $559,000 annual pension, according to an analysis by the Corporate Library, a corporate-governance adviser.
"We will be reviewing their termination packages, and should it be deemed they were unjustly enriched, we have the enforcement tools at our disposal to seek recovery," Corinne Russell, a spokeswoman the Office of Federal Housing Enterprise Oversight, said yesterday.
The dismissals of Raines and Howard came after the OFHEO and the Securities and Exchange Commission said Fannie Mae made mistakes in accounting for contracts designed to protect more than $900 billion of securities from interest-rate swings. Fannie Mae said Wednesday that it will restate its profits for 2001 to mid-2004, and that the restatements may total as much as $9 billion.
One issue to be determined is whether Raines should have been allowed by the company's board to take early retirement, or if he should have been dismissed for cause. If dismissed, Raines wouldn't be able to take his options and stock, and his pension would be trimmed.
The severance packages "aren't appropriate considering the accounting irregularities," said Paul Lapides, director of the corporate governance center at Kennesaw State University near Atlanta. "This may come back to haunt the board."
Fannie Mae said this year that it changed the employment contracts for Raines and Howard to allow the company to eliminate severance payments if the executives were fired for "fraudulent actions."
Raines said Tuesday that he was "retiring" in response to the SEC's finding. A statement from the company that day announced the "retirement" of Raines and the "resignation" of Howard.
Fannie Mae spokesman Brian Faith declined to comment on the severance packages.
Future company filings with the SEC "will include information about the terms of their departures," said Janice Daue, a spokeswoman for Fannie Mae in Washington.
"In most companies there'd be no recourse to a board giving a generous package to a retiring CEO," said Paul Hodgson, a compensation consultant with the Portland, Maine-based Corporate Library. "Fannie Mae has a government charter, so the OFHEO has to sign off."
Last year, Freddie Mac, a smaller government-chartered mortgage buyer based in McLean, Va., ousted its three top executives after accounting errors that forced it to restate earnings by about $5 billion for the three previous years.
The OFHEO filed an enforcement action a year ago seeking $33.9 million in fines and forfeited severance and benefits from former Freddie Mac CEO Leland Brendsel and $3.9 million from former CFO Vaughn Clarke. The administrative action is pending, the OFHEO's Russell said.
Michael Savage, a compensation consultant in Chicago at Aon Consulting, said Raines' separation package "appears generous."
"It just looks like he got a lot," Savage said. "But he was provided a lot of compensation to begin with, so it appears they were just accelerating what had been granted to him."
Also yesterday, the OFHEO approved payment of the company's preferred-stock dividend this quarter and said it will continue to review the payments in coming quarters.
The agency "is not prepared to issue an approval for subsequent periods and will continue to review dividend-payment requests," said Chuck Greener, a Fannie Mae spokesman.
The approval applies to all series of Fannie Mae preferred stock due to be paid Dec. 31, Greener said.
Shares of Fannie Mae fell $2.30, or 3.2 percent, to close at $69.62 yesterday on the New York Stock Exchange.