The chief executive and top financial officer at mortgage giant Fannie Mae were forced out of the company yesterday as the nation's second-largest financial institution struggled...

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WASHINGTON — The chief executive and top financial officer at mortgage giant Fannie Mae were forced out of the company yesterday as the nation’s second-largest financial institution struggled to deal with revelations of serious financial-reporting problems.

Chief Executive Franklin Raines said in a statement issued late yesterday that he had decided to quit because of his pledge to hold himself accountable if regulators determined accounting errors existed.

Recent revelations from government investigators could result in Fannie Mae being forced to restate $9 billion or more in earnings over the past four years.

“By my early retirement, I have held myself accountable,” said Raines, a Seattle native.

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 Howard had also resigned. The company said it had hired an executive-search firm to find replacements for the two men.

Franklin Delano Raines

Age: 55.

Education: A.B., Harvard University, 1971; Rhodes Scholar at Oxford University, 1971-73; J.D., Harvard Law School, 1976.

Experience: Chairman and chief executive, Fannie Mae, 1999-2004; director, Office of Management and Budget, 1996-98; vice chairman, Fannie Mae, 1991-96; partner, investment banking firm Lazard Freres & Co., 1979-91; associate director for economics and government, OMB, 1978-79. Raines and Fannie Mae director Fred Malek head the Washington Baseball Club, a group of investors seeking to buy the Montreal Expos.

Family: Wife, Wendy Farrow Raines; daughters Laura, Andrea and Sarah.

Source: The Associated Press

OFHEO Director Armando Falcon Jr. said in a statement his agency had determined Fannie Mae, the biggest player in the nation’s $8 trillion mortgage market, was “significantly undercapitalized.” He said the Fannie Mae board was to be commended for taking steps 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 $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.

Long a Wall Street darling, Fannie Mae is the biggest buyer and guarantor of home-mortgage loans in the United States and is the country’s second-largest financial institution behind Citigroup.

Raines, a former head of the Office of Management and Budget in the Clinton administration, earned total compensation in salary and bonuses of $20 million last year, while Howard earned $7.7 million.

Fannie Mae’s statement said Raines’ job as chairman and chief executive officer would be split, with Fannie Mae board member Stephen Ashley serving as non-executive chairman and Chief Operating Officer Daniel Mudd serving as interim CEO while the board looks for permanent replacements.

Howard will be replaced on an interim basis as chief financial officer by Fannie Mae Executive Vice President Robert Levin. The company said it had also dismissed its auditing firm, KPMG, and had begun a search for a new auditing firm.

Raines’ abrupt departure represented a sharp reversal of fortune for one of the most influential and politically savvy figures in Washington, D.C.

When he was selected to head Fannie Mae in 1999, Raines became the first African-American CEO of a major U.S. corporation. As chairman and CEO, Raines burnished Fannie Mae’s reputation as a fast-growing yet prudent financial innovator.

Born in Seattle, Raines was one of six children of Ida and Delno Raines.

The family lived in a house that Delno, who was a maintenance worker for the Seattle parks department, built with his own hands. Ida cleaned offices at Boeing, a company that would one day name her son Frank to its board.

While a senior at Franklin High School, Raines won a scholarship to Harvard. One of his professors, the late Daniel Patrick Moynihan, became urban-affairs adviser to President Nixon and a Democratic senator from New York.

Information on Raines’ Seattle background provided by

Bloomberg News.