In 1957, Franklin Raines, age 8, stepped out of the three-bedroom, single-story home that his father built in the Judkins Park area of Seattle and walked down the street to Irving's...

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In 1957, Franklin Raines, age 8, stepped out of the three-bedroom, single-story home that his father built in the Judkins Park area of Seattle and walked down the street to Irving’s Grocery Store for his first job.

From that $2-a-week position to his post as chief executive officer of Fannie Mae, where he earned $20 million last year, Raines rose without a stumble through gilded halls of academia, government and business: Harvard College scholarship, Rhodes Scholar, Harvard Law School, adviser to President Carter, partner at Lazard Freres & Co., budget director for President Clinton.

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Tuesday night, Raines, the first African-American CEO of a Fortune 500 company, finally stumbled. Fannie Mae’s board ousted him after the Securities and Exchange Commission ruled the government-sponsored, shareholder-owned mortgage company made accounting mistakes that may result in a restatement of as much as $9 billion.

Raines’ fall from grace is an American tragedy, his friends and former colleagues say. No one else in U.S. business has overcome similar barriers of race and class and risen so far, only to tumble without hard evidence of personal wrongdoing, they say.

“It’s unique; I can’t think of anyone in literature, politics or business who has become such a fall guy for a series of events beyond his control,” said Stuart Eizenstat, a deputy Treasury secretary under Clinton who hired Raines into the Carter White House. “It is a tragedy for a person of the most upright stature and highest degree of integrity and ability, caused in my opinion by external circumstances.”

Stuart Eizenstat, Deputy Treasury secretary under President Clinton

“It’s the American dream turned into the American nightmare,” said Jeffrey Sonnenfeld, professor of management at Yale University’s School of Management.

For Raines, 55, the ouster “is all difficult and in some ways distressing,” said Steven Pruzan, a Seattle attorney and friend of Raines since they were debating partners at Franklin High School.

“But Frank is doing fine,” Pruzan said after talking to Raines on Wednesday. “He doesn’t define himself by his job — his family is what’s important to him.”

After celebrating Christmas with his wife and daughters at their home in Washington, D.C., Raines plans to spend a week at his vacation retreat overlooking a golf course in Bermuda, Pruzan said.

The question for Raines is whether his departure from Fannie Mae proves to be the end of, or merely a hiatus in, what had been the unbroken trajectory of his professional life. Before his ouster, Raines hadn’t endured even a mild career lapse, Pruzan said. “He just goes from good to better all the time.”

From Raines’ humble beginnings in Seattle — his family occasionally relied on welfare checks to get by — he won entry to Harvard. When one of his professors, Daniel Patrick Moynihan, became urban-affairs adviser to President Nixon in 1969, he hired Raines as a White House intern. At the age of 20, Raines was briefing Nixon on campus unrest.

After his service in the Carter administration and at Lazard, the international investment bank, Raines joined Fannie Mae as vice chairman in 1991, spearheading its legal, credit and finance policies. He left in 1996 to return to government as Clinton’s director of the Office of Management and Budget, where, with Treasury Secretary Robert Rubin, he led the negotiations with Congress to balance the federal budget for the first time since 1969.

When he returned to Fannie Mae as CEO in 1999, Raines repeatedly stressed it aimed to be a paragon of ethical business practices. He joined a group of executives in creating this year an institute for corporate ethics at the University of Virginia.

At Fannie Mae, Raines “made a major effort to be transparent,” said Nell Minow, editor of the Corporate Library, a corporate-governance adviser based in Portland, Maine. “He tried to assure the investor community they weren’t taking advantage of their special public-private relationship.”

Ironically, those very issues led to his downfall. Under the Sarbanes-Oxley Act, passed by Congress in 2002 after such corporate scandals as Enron and WorldCom, Raines and other chief executives were compelled to “get into the weeds” of complex accounting and stake their reputations on the judgment of auditors and chief financial officers, Eizenstat said.

Facing fire over Fannie Mae’s accounting from regulators and congressional Republicans, Raines on Oct. 6 made a fateful pledge.

If “after a thorough review of all the facts it is determined that our company made significant mistakes,” he said, “our board and our shareholders will hold me accountable, and I’ll hold myself accountable.”

The SEC’s ruling found Fannie Mae violated accounting standards by devising a “unique methodology” for complying with SFAS 133, a rule of more than 200 pages that details how companies should account for changes in the “fair value” of derivatives. Derivatives are financial contracts whose value is derived from debt, equity securities, currencies and commodities.

“Raines hoisted himself on his own petard,” said David Dreman, chairman and chief investment officer of Dreman Value Management in Jersey City, N.J. Dreman owns more than 8 million shares of Fannie Mae, making it one of the company’s 25 largest investors.

Raines fell victim to “the new reality of corporate governance,” said Leon Panetta, who served as Clinton’s White House chief of staff from 1994 until 1997. “When there is a problem, you have to show that heads have rolled.”

Raines will rebound by returning to a top position in public service or business, his supporters said. “This is a bump in the road — I’m sure Frank will find his way,” Panetta said.

One issue affecting his future is the outcome of several investigations still under way. Fannie Mae’s regulator, the Office of Federal Housing Enterprise Oversight, and the SEC’s chief accountant are continuing to investigate Fannie Mae’s accounting; the Justice Department and the SEC’s enforcement division are pursuing similar investigations.

Meanwhile, Warren Rudman, a former Republican senator from New Hampshire, is leading an investigation for the Fannie Mae board into the company’s accounting and corporate governance.

Yale’s Sonnenfeld said Raines may find his best prospects in academia or with a nonprofit organization. “I don’t know of any major corporation that will offer him a job, given that he gave sworn statements that proved not to be true,” he said.

Others said Raines shouldn’t be counted out. “He’ll have plenty of options,” said Rep. Mel Watt, D-N.C., who serves on the House Financial Services Committee, which oversees Fannie Mae. Raines’ departure from the company, Watt said, “doesn’t diminish his abilities.”