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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: D. K. G. who wrote (27330)	2/28/2005 2:43:06 PM
From: John Vosilla	Read Replies (2) \| Respond to of 110194

It is quite possible that a major cyber terrorist strike is the trigger that takes the world economy down. A run on banks, lack of access to capital and credit resulting in a sharp fall in consumer confidence could happen rapidly

To: D. K. G. who wrote (27330)	3/3/2005 8:10:08 AM
From: D. K. G.	Read Replies (1) \| Respond to of 110194

Fannie Faces Billions in New Losses Fresh Accounting Concerns For the Mortgage Company May Further Dent Capital By JONATHAN WEIL and JAMES R. HAGERTY Staff Reporters of THE WALL STREET JOURNAL March 3, 2005; Page A3 Fannie Mae could be forced to recognize as much as $2.8 billion in additional losses on its derivatives portfolio because of new accounting concerns recently raised by its chief regulator, according to people familiar with the matter. Those losses would come on top of the estimated $9.18 billion in losses related to derivatives that the mortgage giant already has said it will have to recognize as part of its still-unfinished financial restatement. If Fannie has to recognize the full $2.8 billion in additional losses, that would bring the potential size of its restatement to nearly $12 billion, further chipping into the company's regulatory capital. Fannie's regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, already has deemed the company's capital to be below its statutory minimum requirement. RELATED ARTICLE Fannie, Freddie Shrink, and Investors Wonder Fannie flagged the prospect of additional losses last week when it cautioned investors that Ofheo had identified about a half-dozen significant accounting issues beyond those disclosed last year. In a release, Fannie said that Ofheo "indicated that it has not completed its review of all aspects of these issues, but has identified policies that it believes do not appear to be consistent with generally accepted accounting principles." In describing the newly identified issues, Fannie provided a tightly worded list that provided no hard numbers and few specifics. Since then, both Fannie and Ofheo have declined to quantify the potential impact of any adjustment. "We're not commenting on the potential effects of last week's disclosure at this time," said Chuck Greener, Fannie's chief spokesman. An Ofheo spokeswoman also declined to comment. However, the disclosures in Fannie's second-quarter 2004 financial report, the most recent report it has filed with the Securities and Exchange Commission, provide enough detail to allow a ballpark estimate of the losses that could stem from at least one of the new accounting issues identified in Fannie's Feb. 23 release. The filing shows that Fannie Mae, at June 30, had $2.76 billion in cumulative losses on derivatives called mortgage commitments. While Fannie reflected those losses on its balance sheet, it didn't include them in its earnings or regulatory capital. The term "mortgage commitments," refers to commitments by Fannie to purchase mortgage loans and mortgage-related securities from lenders, usually 30 to 90 days in advance. Losses on such commitments can arise when interest rates move higher after Fannie has agreed to buy a loan at a previously set rate. Depending on the outcome of Ofheo's examination, it is possible some or all of the $2.76 billion loss may have to be released immediately into Fannie's earnings and regulatory capital, said Stephen Ryan, an accounting professor and derivatives specialist at New York University who reviewed Fannie's reports. Because the figure is only a snapshot in time, the actual losses would be somewhat different by the time Fannie's restatement is completed. "That would be the best estimate you've got available," Mr. Ryan said of the June 30 figure. Fannie excluded the $2.76 billion loss from its earnings and regulatory capital by applying a concept known as "hedge accounting." Under hedge accounting, companies in certain instances are allowed to keep changes in derivatives' values from immediately hitting their earnings by designating the derivatives as hedges of other financial exposures. In its Feb. 23 news release, Fannie said Ofheo has questioned whether Fannie qualified for hedge accounting under a set of rules enacted in 2003 called Financial Accounting Standard 149, which governs mortgage commitments. "Ofheo has questioned the adequacy of Fannie Mae's methodology, assumptions and documentation for applying cash-flow hedge accounting to these transactions," Fannie said in its release. "Ofheo also questioned whether certain transactions have been accounted for inconsistently since the inception of FAS 149 on July 1, 2003." The FAS 149 issue is similar to the issue at the heart of the $9.18 billion in derivative losses that Fannie last year said it will have to recognize under a restatement ordered in December by the SEC's chief accountant. Those losses stemmed from Fannie's misapplication of a related set of accounting rules for other types of derivatives, called Financial Accounting Standard 133. Among other things, the SEC's chief accountant determined that Fannie failed to comply with the requirements for hedge accounting -- including FAS 133's rigorous documentation requirements. Mr. Ryan said he sees no reason to believe that Fannie's documentation practices for mortgage-commitment derivatives would have been any better than its documentation practices for derivatives governed by FAS 133. Consequently, Mr. Ryan said, it is likely that Fannie would be required to release all of the $2.76 billion in losses on mortgage commitments, rather than just part of it, into its earnings and capital. The bigger the losses, the more Fannie will have to strain to increase its regulatory capital up to the levels demanded by Ofheo. In recent months, the company already has halved its dividend, raised capital by issuing $5 billion in preferred stock and started to shrink its holdings of mortgages and mortgage-backed securities. If Fannie's restatement results in losses greater than the roughly $9 billion that it had projected earlier, Fannie may have to cut more deeply into its $890 billion of mortgage holdings than Wall Street analysts expect, further slash its dividend or both. Write to Jonathan Weil at jonathan.weil@wsj.com and James R. Hagerty at bob.hagerty@wsj.com ============================================