Obscure agency's soft-spoken chief subdues mortgage giant

Regulator Falcon's probe of Fannie Mae is Raines' undoing

December 25, 2004|By NEW YORK TIMES NEWS SERVICE

WASHINGTON - They sat across from each other in a mahogany and velvet booth at one of those power-lunch restaurants near the White House: the top executive of one of the nation's largest financial institutions and the little-known director of an obscure and historically ineffective federal regulatory agency.

The regulator, Armando Falcon Jr., had just narrowly avoided being ousted from his job. But this was the moment, in September 2003, that Falcon intended to make clear to his lunch guest, Franklin D. Raines, chief executive of the nearly $1 trillion mortgage finance giant known as Fannie Mae, that the balance of power between the two men was about to shift.

"I am not going to be dissuaded," Falcon told Raines, from a broad investigation into the accounting practices at Fannie Mae. "This is necessary. If there are no problems with the company, the company will be better off, as we will so notify all interested parties. But we are going to go ahead."

The announcement of Raines' resignation Tuesday, after the 18-month inquiry by Falcon and his agency, the Office of Federal Housing Enterprise Oversight, should serve as more than sufficient proof that Falcon was not bluffing during that lunch at Old Ebbitt Grill.

How this moribund regulatory agency - which members of Congress were trying to strip of its powers as recently as last year - could force as consummate a politician and businessman as Raines to back down is a testament, several observers in Washington said, to the perseverance of Falcon, a soft-spoken and often underestimated 44-year-old bureaucrat.

"This is not a crusader," said Stanley Sporkin, former head of enforcement at the Securities and Exchange Commission, who has advised Falcon in recent months. "This is a very, very deliberate, decent, focused person, who once he makes a decision, he carries it out."

Fannie Mae is the nation's largest buyer of home mortgages, which it bundles into enormous packages of securities that are resold to investors on the world markets. The activity frees capital for mortgage lenders to reinvest, and it reduces costs on mortgages by indirectly linking homebuyers to huge pools of capital.

It is run like a private corporation - with a board of directors, and Raines as chairman and chief executive since 1999 - but it is a government-sponsored entity that received special benefits from the federal government, including the ability, if necessary, to borrow money directly from the Treasury Department.

The oversight agency has been charged since 1992 with supervising both Fannie Mae and its principal competitor in mortgage financing, Freddie Mac.

The push to intensify the oversight of Fannie Mae by Falcon came after his agency in 2003 suffered one of its most embarrassing moments. Just days after it had declared Freddie Mac to have effective auditing and internal controls, the company disclosed that it had understated its earnings by billions of dollars over several years.

Falcon was seen as part of the problem. To some observers, he did not have the influence, leadership skills or know-how to go up against a trillion-dollar enterprise like Fannie Mae.

In appearances before Congress, Falcon, who took over the agency in 1999, at times was not able to answer questions, deferring to other members of his staff. Sometimes he spoke so softly that he was asked to speak up.

"He was not particularly convincing or inspiring," said Bert Ely, a consultant to financial institutions. "He just came across as someone who was not up to the job."

Falcon, who came to Washington as a young lawyer in 1989 to work on the House Banking Committee under Rep. Henry B. Gonzalez, said there were times when he wondered if he had taken on too big a target. "You can feel overwhelmed by what you are up against," he said.

But as he sought to respond to the embarrassment of the Freddie Mac debacle, he brought in a team of seasoned consultants and staff members including Stephen Blumenthal, a former banking and financial services analyst at Schwab Washington Research Group, and Lynn E. Turner, the former chief accountant at the SEC, as well as Sporkin, who had been general counsel to the CIA and a federal judge for the District of Columbia. Falcon also hired Deloitte & Touche, the global accounting firm, to help examine practices at Fannie Mae.

"We could no longer take it on faith that the external auditor and the company were making sure that the accounting was correct," Falcon said in an interview Wednesday.

With this new approach in place, the key would be to maintain the course, despite attacks that came from certain members of Congress, homebuilders and others, Falcon said.

"Unfortunately, this all got caught up in a political tug of war going on at Capitol Hill," he said. "It became, `Are you pro-housing or anti-housing?' when what we were trying to do was just address safety and soundness."

In September, a report issued by the oversight agency concluded Fannie Mae used a series of accounting tricks to disguise weaknesses that left it vulnerable to instability in the event of a financial crisis. Raines disputed the findings. But the SEC's order last week for Fannie Mae to restate its earnings largely confirmed Falcon's assertions - and meant the end of Raines' tenure.

"I have no animosity toward Frank Raines," Falcon said. "But it is clear that this is bigger than people. This is about the mission of the company and the public interest."

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