Fannie Ex-Execs Settle

Several Fannie Mae (NYSE: FNM) former executives have settled with federal regulators over alleged violations of accounting rules dating back to 2004. Former chief executive officer Franklin Raines, former chief financial officer Timothy Howard, and former controller Leanne Spencer will be required to donate $3 million to charities aimed at helping homeowners keep their homes. In addition, Mr. Raines and Mr. Howard will be forfeiting roughly $16 million in Fannie Mae options. These options are likely to expire worthless, as the options have exercise prices of more than double the current price of Fannie Mae stock.

Though the $3 million was settled by the ex-execs, it will ultimately be paid by Fannie Mae through insurance policies issued to the former executives. This is on top of the $400 million that Fannie Mae paid in 2006 to settle a lawsuit for the same accounting violations. The alleged violations include improperly manipulating earnings to maximize bonuses as well as failing to maintain adequate risk controls.

Mr. Raines maintained his innocence and re-iterated that the settlement was not to be seen as an acknowledgment of any wrongdoing. Since the case began, Mr. Raines has stated that he was unaware of certain accounting irregularities and on Friday he accepted responsibility for the errors of his subordinates.

While I commend Mr. Raines for coming out and accepting responsibility, I am shocked by the miniscule settlement that he and the other former executives were given. $3 million is nothing compared to Mr. Raines’ $90 million compensation from 1998-2003, or Mr. Howards’ $30 million. In addition, and even more outrageous, Fannie Mae will be footing the bill. Granted, the executives are losing certain stock options, but they aren’t worth anything anymore. The only real money Mr. Raines will be on the hook for is about $5.3 million worth of other benefits that he has received.

Mr. Raines and Mr. Howard are still facing a slew of lawsuits filed by shareholders against both Fannie and select current and former executives. I look forward to the day when executives are held financially accountable for their misdeeds against the public. They gain incredible compensation packages when they’re performing well, and should face the music when they screw up. If they’re only on the hook when things are going well, the incentives are to keep things looking good, with the full knowledge that if they get caught doing something wrong, they will be bailed out.

When looking for great companies, it is important to make sure the incentives of the shareholders and the executive teams are aligned. Fannie Mae, if the allegations are true, took advantage of the shareholders by sacrificing integrity. Similar situations have been witnessed at the banking and investment banking institutions. When the economy was booming, executives raked in huge compensation packages. When the economy turned sour – in part because of their greed – the Fed stepped in and bailed them out using our tax dollars, as I’ve written about in other investing blog posts.

How long will shareholders stand for this? How long will taxpayers be willing to bail out those who earn multi-millions per year? I yearn for the day the public wakes from its slumber and demands more from our business leaders.

Freund Investing Managing Member Ryan Freund holds no position in any of the companies mentioned in this article. Freund Investing has a solid Disclosure Policy.