With all the talk about the possible collapse of Fannie Mae and Freddie Mac, there is little said about the departure under a cloud in 2004 of Fannie Mae CEO Franklin Raines. Raines was accused of cooking the books to hide losses so that his take-home pay would be higher by millions. In 2004 the real estate market was hot, maybe not as hot as it was a year or two later, but plenty hot enough for Fannie Mae to play fast and loose with the rules.
In 2004, USA Today reported: "In the financial arena, detractors say, Fannie Mae has grown out of control. It's the No. 2 debtor in the country, after the U.S. government, with $989 billion in debt. Some have even called Fannie Mae a giant hedge fund, since it uses derivatives and other potentially risky investment tools."
When Raines "resigned," USA Today reported: "Franklin Raines, the powerful and politically savvy CEO of Fannie Mae, was forced out Tuesday night by the mortgage finance company's board of directors, bringing an end to a contentious, three-month public brawl over the quality of Fannie's financial statements. That restatement of earnings is likely to wipe out $9 billion — or about one-third — of Fannie Mae's profits — since 2001. But analysts say that shouldn't have any effect on mortgage rates. To make up the anticipated $9 billion shortfall, Fannie Mae probably would have to sell part of its portfolio of mortgages, raise fresh capital by issuing stock or cut dividends — and its spectacular growth of recent years could be curtailed. The company was ordered by the regulators in September to boost its capital cushion against risk by some $5 billion by mid-2005."
So, Fannie Mae was already in trouble before the mortgage tsunami hit.