Born: January 14, 1949
Education: Harvard (BA) ( JD), Oxford
Previous job: CEO of Fannie Mae
Political Party: Democrat
Simply put, Fannie Mae purchases most of the mortgages that banks issue and then sells them to market. Franklin Raines was in charge of this for Fannie, and during his time was able to direct huge sums of capital to the mortgage market. He was also able to create incentives and set up ever easing criteria for purchasing these mortgages. He encouraged lenders to loan easy money with the promise that Fannie Mae would continue to subsidize this practice and that there was an endless appetite for these mortgages in the open market. With these incentives in place, and the money pumping through the system, he leveraged the company at well over 100 times, putting tremendous risk onto the company's balance sheet. While times were good, this insanity created huge profits. Because of these huge short term profits, Raines pocketed over $90 million during his five year tenure as CEO of Fannie. He then retired right as an investigation into accounting irregularities had begun, which resulted in a $25 million dollar fine to Raines. By my count that still adds up to $65 million. Not bad.
Raines left the company with "books that were cooked", huge amounts of risk and leverage and an inevitable reckoning with reality coming its way. Because Fannie Mae was a Government Sponsored Entity it essentially had the guarantee of the U.S. government behind it. This was always understood in the financial community even if not understood by the masses of people. This meant that the profits were private but the losses were public. Great business model for them I guess. After the meltdown occurred, the government swooped and bailed them out, putting the US tax payers on the hook for multiple trillions of dollars. Yes "TRILLIONS"!
Many on Wall St. did exactly the same thing that Franklin did, and their companies were bailed out too; however, not anywhere near the level that Fannie Mae was. It was always a rigged game that Franklin ran and no matter what happened he would win. You losing was just a cost of doing business.
Key Quote: "That is - the reason for that is that home prices are only going to go up. Now, they've never gone down nationwide in our - since we've been keeping track of this."