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Thursday, Dec. 16, 2004

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  SEC chief accountant Donald Nicolaisen disclosed the findings of the agency's review late Wednesday and said he had told the government-sponsored company to restate its earnings.

Nicolaisen said in a statement that Fannie Mae's accounting for 2001 through mid-2004 ``did not comply in material respects'' with accounting rules for derivatives, financial instruments used to hedge against interest-rate swings, and for some transactions related to loans.

Fannie Mae, the biggest financer of home mortgages in the country, said last month that if the SEC found that it had improperly accounted for derivatives, it would show an estimated net loss of $9 billion. That would erase about one-third of the company's reported profit since 2001.

A restatement could involve at least that much in unreported losses and overreported earnings, depending on the movement of interest rates, analysts and other experts said Thursday.

The $9 billion estimate ``is certainly on the low side,'' said Rep. Richard Baker, R-La., chairman of the House panel that oversees Fannie Mae and a longtime critic of the company.

``There is certainly going to be very close scrutiny and examination'' of the company by Congress, he said in a telephone interview.

Several lawmakers, including Senate Banking Committee head Richard Shelby, R-Ala., used the SEC's findings to renew calls for tighter government reins on Fannie Mae and Freddie Mac, its smaller rival in the multitrillion-dollar home mortgage market.

In light of developments, ``I do think it's highly likely that both Tim Howard and Frank Raines,'' the company's chief financial officer and chairman, respectively, will be forced to leave their positions, said Edwin Groshans of investment banking firm Fox-Pitt, Kelton. Otherwise, he said, ``They're just going to be a lightning rod.''

Raines and Howard defended the company's accounting in sworn testimony at a congressional hearing in October and rejected allegations by the Office of Federal Housing Enterprise Oversight of accounting improprieties and management misdeeds going back to the late 1990s.

Raines said at the hearing that if the SEC found accounting violations, he would be held accountable by the company's board and shareholders and would himself take responsibility.

The SEC and the Justice Department, in a separate criminal probe, have been investigating the accounting of Washington-based Fannie Mae, the second-largest financial institution in the country behind Citigroup Inc.

Warren Rudman, the attorney and former senator who is acting as independent counsel to a special committee of Fannie Mae's board, declined to comment Thursday on possible next moves.

``We continue with our internal investigation,'' he said by telephone, describing the inquiry as ``intensive and very broad-based.''

Raines and Howard were not available for comment Thursday, said company spokeswoman Janice Daue.

Fannie Mae spokesman Chuck Greener, in a statement issued Wednesday night, said ``We appreciate the comprehensive and expeditious review of these accounting issues.''

``We will take the steps necessary to comply fully with the SEC's determination,'' he said. ``Fannie Mae is committed to operating in a safe and sound manner.''

Nicolaisen said the SEC took the unusual step of making public the findings of the staff review before the SEC had completed its investigation because Fannie Mae had asked the agency for its opinion.

``I have advised Fannie Mae that ... to provide investors with appropriate information, Fannie Mae should restate its financial statements,'' Nicolaisen said.

In September, the OFHEO regulators cited Fannie Mae for serious accounting problems and accused the company of earnings manipulation. The regulators had ordered Fannie Mae to complete massive recalculations, and the delay fueled speculation as to whether the company would restate earnings.

Fannie Mae last month missed an SEC deadline for filing its third-quarter financial results after its independent auditor KPMG refused to sign off on the report. The company also acknowledged that some of its accounting practices don't comply with generally accepted accounting principles.

OFHEO spokeswoman Stefanie Mullen said Thursday that the agency was working with Fannie Mae ``to address the impact this decision will have on the company's capital position and on other areas within our responsibility as safety-and-soundness regulator.''

``We appreciate that the SEC has moved expeditiously in rendering an opinion on OFHEO's findings to date of the special examination of Fannie Mae,'' Mullen said.

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 held by investors around the world.

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