FANNIE MAE VIOLATED accounting rules and must restate earnings for the past four years, the SEC's chief accountant found. The decision will force Fannie to recognize an estimated $9 billion of losses on derivatives. 10:41 p.m.
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The restatement is expected to push Fannie below the minimum capital requirements set by its regulators. The company, which reported earnings of $5.43 billion for this year's first nine months, may have to sell some of its more than $900 billion of mortgage-related holdings to raise capital. It already has slowed its purchases of mortgages in recent months and may need to reduce its dividends and take other steps to shore up its finances.
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In a statement issued yesterday evening, U.S. Rep. Richard Baker (R., La.), a longstanding critic of the company, called Fannie's accounting violations "mind-boggling." He said, "I expect to hold a hearing early next year to demand from Fannie an explanation of how, moving forward, subcommittee members can possibly have confidence in Fannie's current management." Rep. Michael G. Oxley (R., Ohio), chairman of the House Financial Services Committee, said that he is "deeply disturbed that investors, the markets and Congress were misled by deceptive practices at Fannie Mae."
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Fannie's computer models for analyzing such changes in late 1998 showed that it would need to recognize $400 million of expenses, according to Ofheo. Rather than taking the whole hit in 1998, however, Fannie decided to recognize only $200 million in expenses.
Had the entire $400 million been recognized immediately, the regulator says, the hit to earnings would have prevented Mr. Raines and four other senior executives from receiving a total of nearly $6 million of bonuses for 1998.
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