The chief executive and top financial officer at mortgage giant Fannie Mae were forced out of the company as the second-largest US financial institution struggled to deal with revelations of serious financial-reporting problems.
Chief executive Franklin Raines said in a statement issued late on Tuesday that he had decided to resign because of his pledge to hold himself accountable if regulators determined the existence of accounting errors.
Recent revelations from government investigators could result in Fannie Mae being forced to restate US$9 billion or more in earnings over the past four years.
"By my early retirement, I have held myself accountable," Raines said.
Industry and congressional sources, who spoke on condition of anonymity, said Fannie Mae's board had been pressured to ask for the resignations of both Raines and chief financial officer Timothy Howard by the company's chief regulator, the Office of Federal Housing Enterprise Oversight (OFHEO).
A Fannie Mae statement announced that Howard had also resigned. The company said it had hired an executive search firm to find replacements.
OFHEO Director Armando Falcon said in a statement that his agency had determined that Fannie Mae, the biggest player in the nation's US$8 trillion mortgage market, was "significantly undercapitalized." He said the Fannie Mae board was to be commended for the steps it had taken to address its accounting problems.
"We are encouraged that the board's announcement signals a new culture and a new direction for Fannie Mae," Falcon said.
A review by the Securities and Exchange Commission determined last week that Fannie Mae must restate earnings back to 2001 because it violated accounting rules for derivatives -- financial instruments used to hedge against interest-rate swings -- and for some prepaid loans.
Fannie Mae had previously said a US$9 billion restatement was likely if the SEC found its accounting was flawed. That would wipe out about one-third of the company's reported profits since 2001. Fannie Mae, long a Wall Street darling, is the biggest buyer and guarantor of home mortgage loans in the US and is the country's second largest financial institution behind Citigroup Inc.
Raines' abrupt departure represented a sharp reversal of fortune for one of the most influential and politically savvy figures in Washington, known for adroitly applying charm, persuasion and -- occasionally -- gentle arm-twisting behind the scenes on behalf of Fannie Mae, one of the most politically connected institutions in Washington.
When he was selected to head Fannie Mae in 1999, Raines became the first African-American CEO of a major US corporation. As chairman and CEO, Raines, 55, burnished Fannie Mae's reputation as a fast-growing yet prudent financial innovator.
He had been successful in fending off efforts by competitors and congressional critics to strip away some of the privileges the company enjoyed as a government-sponsored enterprise, which allowed Fannie Mae to borrow money at below-market rates because investors believed if the company ever got into financial trouble, the federal government would step in and bail it out.
However, a blistering report by OFHEO, which was made public in September, cast doubt on Fannie Mae's past earnings reports and even its financial soundness. OFHEO raised the possibility that the company had employed deliberate accounting maneuvers designed to meet earnings targets and thereby bring bigger bonuses to top executives.