Banking Law

As Rod Stewart sang, "Some guys have all the luck." Certainly, Franklin Raines and Timothy Howard appear to be "fortunate sons."

In August 2006, the Department of Justice dropped criminal investigations against the two former Fannie Mae officials. Last week, the OFHEO announced that the two men, along with the company's former controller, Leanne Spencer, had agreed to pay some relatively minor fines and to give up some worthless stock options, in return for a full settlement of allegations that they had conspired to inflate Fannie Mae's earnings in order to pump up their compensation.

Raines is paying $24.7 million, including a $2 million penalty and the forfeiture of stock options, the Office of Federal Housing Enterprise Oversight said in a statement today. Former Chief Financial Officer Timothy Howard will surrender $6.4 million, and Leanne Spencer, who was the Washington-based company's controller, was fined $275,000.

That might sound like a lot of money to most of us, until you compare it to what OFHEO alleged was its damages when it commenced administrative proceedings against these individuals.

The settlements, short of the $215 million in damages sought by Ofheo, ends more than a year of fighting with the executives over who was responsible for $6.3 billion in misstatements at the government-chartered company. Fannie Mae insurance will pay the $3 million cash portion of the settlements.

Note that the defendants don't come out-of-pocket for the cash settlement, the insurance company does. Therefore, the defendants must be giving up something very valuable other than cash as part of the over $32 million that the defendants are "paying" or "giving up," right? Not so fast.

Raines will pay a $2 million fine to the federal government [Ed: paid for by insurance]; relinquish claims on stock options valued at $15.6 million when they were issued; donate $1.8 million in proceeds from the sale of Fannie Mae stock to charitable programs that help struggling homeowners; and forfeit about $5.3 million in other benefits that Ofheo didn't disclose.      

Raines was given stock options in 2000 through 2003 for 932,000 shares at exercise prices ranging from $69.43 to $80.95 a share. After he left, the shares never rose above $72 and now trade at less than $30, signaling any options he relinquished would be worthless.

In addition to the insurance company covering the cash, the stock options are worthless, yet constitute $15.6 million of the $24.7 million Raines is "paying" to settle the lawsuit. Another $5.3 million consists of foregone "undisclosed benefits" that Raines never received, but that he arguably has a right to claim.

Howard's $750,000 fine will be covered by insurance. He will surrender $5.2 million in stock options, donate $200,000 in proceeds from stock sales to charity and forfeit other benefits valued at $240,000, Ofheo said.

Again, less than impressive, isn't it?

The defendants' counsels claimed victory, and I don't blame them. Although shareholder litigation against these individuals is pending, today's The Wall Street Journal notes that such litigation is also likely to end in a settlement. On the other hand, the defendants have to pay their lawyers, which ought to put a dent in their wallets. Moreover, the WSJ also alleges that "the careers of Messrs. Raines and Howard were shattered." Perhaps. One thing this country's good at is giving people a second chance (assuming, unlike, say, Ken Lay or Jeff Skilling, you stay out of jail and/or don't drop dead). I wouldn't be surprised to see one or more of these individuals make a come-back.

Maybe Donald Trump will transform them.