If there is one element of the 2008 financial meltdown that likely unites Americans of every political persuasion it is the idea that some of the worst actors involved remain unpunished for their malfeasance. Moreover these malefactors not only remain unpunished, but have done quite nicely for themselves despite the economic swoon that has battered millions of Americans. Two former Fannie Mae executives, James Johnson and Franklin Raines, are textbook examples of the odious crony capitalist/government nexus which turns a blind eye to greed, incompetence, and arguably criminal behavior for the well-connected.
We begin with James Johnson, a politically astute and well-connected Democratic supporter who was appointed chief executive of Fannie Mae in 1991. As best revealed in the book Reckless Endangerment, Johnson decided his mission was to expand home ownership–and enrich himself and others in the process. As the book explains, for years Fannie Mae’s compensation structure was “a conservative one with executive pay linked to a wide range of performance measures,” including “how well the company managed its cost each year and what its return on assets was, a calculation of how much the company made on the loans it held on its books.” Johnson’s strategy? Tying compensation “almost solely to earnings growth.” As a result, between 1993 and 2000, executive incentive pay more than quadrupled from $8.5 million to $35.2 million. In 1995, the level of greed was palpable: of the $7 billion raised by Fannie largely on the basis that the federal government implicitly guaranteed its debts, Johnson and other executives kept $2.1 billion for themselves and their shareholders.
Much of this money was used to buy influence in Congress via campaign contributions and among activist groups such as ACORN, the Congressional Black Caucus and the Congressional Hispanic Caucus. Tens of millions of dollars were also spent on advertising and a raft of pro-Fannie academic studies. All of it was designed to blunt any criticism of Fannie–more often than not with accusations of racism due to Fannie’s involvement in billions of dollars of minority sub-prime loans–and undermine several attempts to rein in its now well-documented excesses. Excesses which have cost taxpayers more than $153 billion to date.
How could Johnson get away with it? Two paragraphs from a book review of Reckless Endangerment are very illuminating:
The authors are at their best demonstrating how the revolving door between Wall Street and Washington facilitated the charade. As Treasury secretary, Robert Rubin, formerly the head of Goldman Sachs, pushed for repeal of the Depression-era Glass-Steagall Act that had separated commercial from investment banking–a move that Sanford Weill, the chief executive of Travelers Group had long sought so that Travelers could merge with Citibank. After leaving the Treasury, Rubin became Citigroup’s vice chairman, and “over the following decade pocketed more than $100,000,000 as the bank sank deeper and deeper into a risky morass of its own design.” With Rubin’s protégé Timothy F. Geithner as its head, the New York Federal Reserve Bank reduced its oversight of Wall Street.
A tight web of personal relationships connected Fannie, Goldman Sachs, Citigroup, the New York Fed, the Federal Reserve and the Treasury. In 1996, Fannie added Stephen Friedman, the former chairman of Goldman Sachs, to its board. In 1999, Johnson joined Goldman’s board. That same year Henry M. Paulson Jr. became the head of Goldman and was in charge when the firm created many of its most disastrous securities–while Geithner’s New York Fed looked the other way. As the Treasury secretary under George W. Bush, Paulson would oversee the taxpayer bailout of Fannie Mae, Freddie Mac, Goldman, Citigroup, other banks and the giant insurer American International Group (A.I.G), on which Goldman had relied. As head of the New York Fed, and then as the Treasury secretary, Geithner would also oversee the bailout.
Johnson left Fannie Mae in 1998. During his tenure there he amassed more than $100 million in compensation, as well as millions of dollars in guaranteed consulting fees and other perks, including “an office, two secretaries and a car and driver for himself and his wife,” according to the Washington Post.
On to Franklin Raines. Mr. Raines was the White House budget director for the Clinton administration during the 1990s. In 1999, he became Chairman and chief executive of Fannie Mae and remained there until 2004, when he was forced to resign less than a week after the Securities and Exchange Commission (SEC) directed the mortgage giant to make “accounting corrections” that would result in $6.3 billion of profits being erased. That figure was amended to $10.6 billion in a 2006 report by Office of Federal Housing Enterprise Oversight (OFHEO) which also alleged that, during Raines’ tenure, Fannie Mae “systematically manipulated accounting estimates, ignored accounting requirements it had lobbied unsuccessfully against and operated with weak internal controls that helped obscure the other problems.” The OFHEO report further noted that the company “delayed booking $200 million of expenses in 1998, which allowed Raines and other top executives (including James Johnson) to receive millions of dollars in bonuses linked to Fannie’s profit.”
The level of executive bonus compensation between the years 1998 and 2004 was huge. $115 million was spread around to “Mr. Raines, chief financial officer J. Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae” due to accounting procedures the OFHEO report labeled as “inconsistent with the values of responsibility, accountability, and integrity.”
The government sued Mr. Raines along with two other company executives, seeking $100 million in fines and $115 million in restitution for bonuses “that were not earned.” In 2008, a settlement was reached in which Raines relinquished company stock options, proceeds from stock sales and other benefits totaling $24.7 million. Yet according to the Seattle Times, people familiar with the deal contended that stock options, worth $15.6 million at the time they were issued to Raines, were of “negligible value” at the time of the settlement, due to Fannie Mae shares being hammered by the housing meltdown. Moreover while the size of the fine seems large, context reveals otherwise: Raines’ total compensation from 1998 through 2004 was $91.1 million, including some $52.6 million in bonuses, according to OFHEO.
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