Fannie Mae Warns of Possible $9 Billion Loss

NY Times ^ | Published: November 16, 2004 Filed at 4:55 p.m. ET

[DeaconBenjamin]

Shares of Fannie Mae slipped Tuesday as the mortgage giant's outside auditor KPMG refused to sign off on its third-quarter earnings report, causing the company to miss a regulatory deadline for filing it.

The company's stock fell 80 cents, or 1.1 percent, to close at $69.40 on the New York Stock Exchange.

Fannie Mae, whose accounting is under investigation by the Securities and Exchange Commission, also said Monday that if the agency finds that it has improperly accounted for derivatives -- the financial instruments it uses to hedge against interest-rate swings -- it would show an estimated net loss of $9 billion for the July-September period. And it acknowledged that some of its accounting policies do not comply with generally accepted accounting principles.

Washington-based Fannie Mae, which finances one of every five home loans in the United States, disclosed the SEC investigation on Sept. 22, stunning investors.

The company, recently cited by regulators in the Office of Federal Housing Enterprise Oversight for serious accounting problems and accused of earnings manipulation, notified the SEC Monday that it would not file the third-quarter report on time.

The OFHEO regulators had ordered Fannie Mae to make massive recalculations, and the delay fueled speculation as to whether the company would restate earnings.

SEC spokesman Matt Well declined comment on the filing as did Corinne Russell, a spokeswoman for OFHEO, an independent agency within the Department of Housing and Urban Development. Spokesmen for Big Four accounting firm KPMG could not be reached for comment Monday.

In its filing notifying the SEC, Fannie Mae said it ``is not able to file a timely (quarterly report) that complies with the SEC's rules because it has been advised by its independent auditor that it is unable to complete its review of Fannie Mae's interim unaudited financial statements for the quarter ended September 30, 2004.''

Fannie Mae also acknowledged that some of its accounting policies do not comply with generally accepted accounting principles, apparently contradicting recent public statements by top executives who have defended the company's accounting.

Chief executive Franklin Raines and Chief Financial Officer Timothy Howard insisted in sworn testimony at a congressional hearing last month that the HUD regulators' allegations of accounting improprieties and management misdeeds going back to the late 1990s were a matter of interpreting complex rules.

In its filing Monday, the company said it ``recently determined that its methodology for performing'' some calculations for 2001 and 2002 balance sheets ``was not consistent'' with generally accepted accounting principles. It said it expects the effect of the discrepancies will be an increase in earnings for 2001 and 2002, and a decrease in 2003 profits, ``with the cumulative effect of these changes across the three periods netting to zero.''

The ``catch-up'' calculations in question were related to 1998 expenses that OFHEO had said the company incorrectly put off to future periods so that top executives could collect full annual bonuses.

The stakes are high for Fannie Mae, the second-largest financial institution in the country behind Citigroup, which also faces a criminal investigation by the Justice Department.

The SEC inquiry makes things potentially tricky for Fannie Mae. Also by law, the quarterly financial reports must be certified in writing by Raines and Howard.

If the SEC investigators turn up accounting violations in the quarter, that could expose Fannie Mae and its executives to legal liability with shareholders and others, some analysts say.

A restatement could lead Fannie Mae's board to shuffle the company's executive ranks.

Fannie Mae and its smaller sibling Freddie Mac pump money into the home mortgage market by buying and guaranteeing repayment of billions of dollars of home loans each year from banks and other lenders, then bundling them into securities that are resold to investors. Their stock and debt are widely held by investors worldwide.

[Petronski]

Shocker!

[Ann Archy]

Franklin Raines should be in DEEP doo-doo!! I also pray that Jamie Gorelick looses her multi-MILLION dollar bonus from Fannie Mae and I hope she's in DEEP doo-doo!

[shubi]

Well, as long as they got their full bonuses, its ok then.

[IStillBelieve]

Despite all the hooh-hah to the contrary, if push comes to shove US taxpayers will indeed bail out Fannie Mae.

[ARCADIA]

Despite all the hooh-hah to the contrary, if push comes to shove US taxpayers will indeed bail out Fannie Mae.

It is either that or we bail out the entire banking system.

[SedVictaCatoni]

Despite all the hooh-hah to the contrary, if push comes to shove US taxpayers will indeed bail out Fannie Mae.

And a good thing, too, frankly. Certainly the regulators should fire everyone in sight if FNMA ends up needing to be bailed out, but this company provides such a massively useful function for the economy, that a bailout, if it proves necessary, would be an extremely good idea.

[nanak]

End of REAL-ESTATE bubble is in sight.

[TFine80]

This is a Democrat scandal, and we better be prepared to argue this against people who will spin it the other way.

Not only did this clearly get out of control under Clinton, but Democrats line the whole management. Mortgage policy cannot be social policy alone.

[Grampa Dave]

Another example of how PC liberals can't manage a company honestly.

The liberals can't win elections honestly, report the news honestly nor can they run companies honestly.

[lizma]

I always wondered what was their advertising budget. For awhile their commercials were everywhere.

[Rhetorical pi2]

These people are Clintonistas who are accustomed to playing fast and loose and cooking the books.

They have gotta go!!

If this was a "normal" corporation and not run by Democrat political hacks, the press would be screaming "Enron!"

[Mo1]

Cooked books ????

[Joe Hadenuf]

Despite all the hooh-hah to the contrary, if push comes to shove US taxpayers will indeed bail out Fannie Mae.

May as well, we're already bailing out the government sponsored invasion of millions of illegals that continue to pour into our country.

[Moonman62]

End of REAL-ESTATE bubble is in sight.

It's got to end at some point, but Fannie Mae's stock hardly budged on the news. I don't think this will be the catalyst.

[traviskicks]

This is what Big Government does with taxpayer money.

We need to cut government and cut taxes! Why won't anyone do it!?!

[Southack]

"Despite all the hooh-hah to the contrary, if push comes to shove US taxpayers will indeed bail out Fannie Mae."

What's to "bail out"?

Fannie Mae has *already* loaned out the money that was used by average Americans to buy houses. Those houses are already bought. The money has already been transfered.

You could shut FNM down tomorrow and all of the prior home sales from 1998-2004 wouldn't change a Dollar or a title.

Now granted, Raines is a Democrat and a crook at FNM, but let's not lose sight of the fact that nothing needs to be "bailed out." FNM has already paid the title holders for those homes. It's not like the government has to come in to protect everyones' houses.

Whether FNM shows a paper loss or profit impacts *nothing* from the past through to today. It *might* impact how many home loans they can finance in the future, but that's hardly the stuff of S&L level government bailouts.

Remember that FNM is not like a normal company that has borrowed money for daily operations. FNM is essentially a creditor. Even if Fannie Mae went entirely out of business, the impact would be limited to those applying for new home loans, not old ones.

[Odyssey-x]

Bonk!! Interest rates go up just a little bit and WHAMMO!!! The slowly forming but gigantic whirlpool of low interest rate debt having to get paid back with higher interest rate debt begins to appear.

[Excuse_My_Bellicosity]

Funny how the media screamed about Enron but they're doing damage-control on this. That tells me that there are a lot of prominent DemonRats investing in Fannie Mae.

[Carry_Okie]

More Clinton flotsam that will be blamed on Bush.