Franklin Raines

Fannie Mae

On Labor Day, he was a favorite to be Treasury Secretary should John Kerry win the White House. At yearend, he had left under a cloud. The charmed career of Franklin D. Raines -- a poor kid from Seattle who climbed through Harvard and a Rhodes Scholarship to become White House budget director and CEO of Fannie Mae (FNM ) -- crashed to a halt on Dec. 21. That was six days after the Securities & Exchange Commission's top accountant declared that mortgage giant Fannie misstated earnings for 3 1/2 years, leading to an estimated $9 billion restatement that will wipe out 40% of profits from 2001 to mid-2004.

Supporters of Raines, 55, insisted that he wasn't culpable for Fannie's misuse of obscure accounting standards. But that argument didn't wash. Raines was in charge in 2001, when Fannie chose to create what the SEC dryly called "its own unique methodology" to calculate the earnings impact of its trillion-dollar portfolio of derivatives. Raines gave Chief Financial Officer J. Timothy Howard free rein and tolerated "weak or nonexistent" financial controls, according to a scathing report issued in September by the Office of Federal Housing Enterprise Oversight, Fannie's regulator.

Worse, the CEO failed to manage the scandal. When sibling Freddie Mac's accounting first came under fire in mid-2003, Raines's arrogant insistence that Fannie was above reproach spurred OFHEO to do a white-glove examination. And when that uncovered the improper bookkeeping, Raines insisted on an SEC review, which he maintained would vindicate Fannie. "Frank was supposed to be the great political risk manager," says independent banking analyst Bert Ely in Alexandria, Va. "Instead, he compounded the problems."

When Fannie's board balked over ousting Raines, OFHEO forced its hand. Raines described his exit as an "early retirement' that was self-initiated and says that it shows he was accountable for the SEC findings. Fittingly, Raines -- a man who built a $54 billion behemoth with his mastery of behind-the-scenes politicking -- went down spinning.

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