A few hundred billion here, a few hundred there, and just enough corruption to make one feel we are in China. At minimum this should be another big credit widening situation.
DJ Fannie Forced To Recalculate Losses, Earnings
By Dawn Kopecki
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Fannie Mae (FNM) came under fire again Thursday as its federal regulator directed the company to recalculate several quarters of earnings by the end of next week, saying Fannie's financial statements do not accurately reflect losses in its aircraft lease and manufactured housing investments.
"The current accounting of Fannie Mae does not reflect the earnings volatility associated with these assets, does not best reflect the actual economic performance and does not recognize on a timely basis impairments of the portfolio," Armando Falcon, director of the Office of Federal Housing Enterprise Oversight, said in a letter to Chief Executive Franklin Raines.
"These are inconsistent with the objectives of providing high-quality earnings information and achieving a 'best in class' level of accounting expected of the enterprise," Falcon said.
The news came as another prominent Federal Reserve official called for tighter restrictions on Fannie and fellow government-sponsored enterprise Freddie Mac (FRE), saying their hedging strategies are far more risky than the companies disclose.
Corrections to the way Fannie accounted for its impairments could force the company to restate its earnings if those losses turn out to be "material" to its financial performance. The calculations, in and of themselves, however, would not automatically trigger a restatement, the Office of Federal Housing Enterprise Oversight said.
"The recalculations for impairments have to be done," OFHEO spokeswoman Corinne Russell said. "After the recalculation is complete, a determination will be made if a restatement is warranted."
Falcon directed Fannie to recognize asset impairments "in the periods in which they occur," beginning in the last quarter of 2002. He reminded Raines, who was speaking at a Fed conference in Chicago, that OFHEO's examination is not yet complete and may require additional corrections in other areas.
"As you are aware, the related matters of fair value estimation, cash flow forecasting and internal controls remain under review and OFHEO may have findings to communicate to you in these matters in the future...findings that may require further financial analysis on your part," Falcon said.
OFHEO launched a probe late last year into Fannie Mae's accounting policies after widespread problems were found at fellow government-sponsored enterprise Freddie Mac (FRE) last summer and a multiyear reaudit resulted in a $5.1 billion net increase in earnings from 2000 through 2002.
The news renewed calls on Capitol Hill to revive legislation strengthening the companies' regulator.
"Bit by bit by bit, the evidence is mounting of inadequate disclosures in the world of housing finance," said Rep. Richard Baker, R-La., chairman of the House Financial Services subcommittee that oversees the companies. "And I really don't know how much longer anyone can continue credibly standing there with his finger in the dike, holding back tougher regulatory oversight of the housing GSEs."
Fannie Mae officials indicated that they will comply with OFHEO's request. At the same time, they appealed to the Securities and Exchange Commission, specifically to determine whether they will also have to publicly disclose the data. The company is expected to file its first-quarter earnings report with the SEC on Monday.
"As has been reported in the media, we are seeking guidance from the SEC on these issues as they relate to our filings with the commission," Fannie spokesman Chuck Greener said in a statement.
People close to the situation say Fannie is trying to strong-arm OFHEO by outspending the tiny regulator, retaining an army of former SEC attorneys and accountants experts.
"With regard to the issues raised in the letter issued by OFHEO, Fannie Mae believes our accounting complies with (generally accepted accounting principles), and KPMG, our independent auditor, concurs. Additionally, Ernst and Young, the advisor to our outside legal counsel, concurs with the views of the company and KPMG," Greener said.
OFHEO has hired Deloitte & Touche LLP to aid in its probe. OFHEO officials also met with the SEC earlier Thursday to discuss some of Fannie's accounting policies, according to SEC spokesman Matthew Well, who declined to elaborate on the meeting. OFHEO officials would not comment on the meeting.
"We're working cooperatively with OFHEO on this as we would with any financial regulator," Well said.
Fannie Armed For Battle
Fannie's outside counsel, Wilmer Cutler Pickering LLP, is one of the top securities litigation law firms in the country. Fannie also employs, directly or through Wilmer, two of the nation's four "Big Four" accounting firms to defend its accounting practices in the OFHEO investigation.
Wilmer Cutler maintains extremely close ties with the SEC, referring internally to the agency as "Wilmer Cutler-East," according to people familiar with the matter. The firm has hired about 20 former SEC attorneys over the last decade, including long-time enforcement chief William McLucas. McLucas led the SEC in numerous high-profile investigations, including its case against notorious junk bond trader Michael Milken.
Massachusetts Rep. Edward Markey, a top Democrat on the House committee that oversees the accounting industry, said he hopes the SEC and OFHEO work together to ensure that Fannie's financial disclosures are proper.
"When I was a boy and my Mom told me I couldn't do something, I used to ask my Dad and see if he'd give me a different answer. That sounds like what seems to be happening here," Markey said. "I certainly hope that the regulators will not allow themselves to become part of a regulatory arbitrage."
Fannie startled the financial markets last month when it released its quarterly earnings for the first time without a balance sheet. Company officials downplayed the missing data, saying they needed time to review complex figures related to shareholder equity.
Some speculate that the delay was done to give Fannie more time to correct some of the transactions disputed by OFHEO before it files its 10-Q Monday.
Fannie CEO Raines, who was speaking at the same bank conference in Chicago on a panel with St. Louis Federal Reserve Bank President William Poole, kept his comments about the accounting probe to a minimum. Raines made no indications that the company plans to restate its earnings, telling reporters when asked, "OFHEO has not asked us to."
Raines spent most of his time defending against long-standing arguments that the company poses a risk to the broader economy because of its sheer size.
"There is nothing inherent in our institution that raises unique systemic risk issues," Raines said.
(MORE) Dow Jones Newswires
May 07, 2004 07:37 ET (11:37 GMT) |
