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

To: patron_anejo_por_favor who wrote (61643)	5/22/2006 6:13:07 PM
From: Paul Kern	Respond to of 110194

DJ Report To Recommend Limiting Fannie Mae's Growth-Sources-2 Fannie Mae announced late Monday it would hold an investor call Tuesday afternoon with Stephen B. Ashley, chairman of the board and Daniel H. Mudd, president and chief executive. OFHEO officials met in the morning with regulatory agencies and in the afternoon with officials on Capitol Hill. At the briefings, OFHEO staff didn't disclose how much they planned to fine Fannie Mae or which current executives would be subject to the new probe. While the staff at OFHEO indicated that they didn't uncover any major new information or accounting lapses, the OFHEO report drew much different conclusions than the February report, which was led by former New Hampshire Sen. Warren Rudman, the sources said. For example, one person familiar with the briefings said the OFHEO report explains not only how the accounting problems occurred but "why the problems happened." "The report is going to be tougher on the board than the Rudman report was," a congressional source said. The OFHEO report is also going to allege that Fannie Mae management manipulated its earnings in order to meet earnings-per-share targets, the sources said. The OFHEO report shows that "the earnings were deliberately manipulated in order to make those targets and maximize bonuses," the Congressional source said. The report is expected to consist of multiple recommendations from the staff to Lockhart, the sources said. In addition to limiting Fannie Mae's growth, the staff is set to recommend that OFHEO continue to require Fannie Mae to hold a 30% capital surplus, the sources said. This capital requirement has been in place since OFHEO released an earlier version of the report in September 2004. OFHEO staff also is going to recommend stricter oversight by the board of directors, the sources said. Such recommendations are typical after an extensive review. When OFHEO released its examination into Freddie Mac in December 2003, it included 16 recommendations. Under regulatory scrutiny, Fannie Mae has said it must restate its financial statements from January 2001 through mid-2004. It has estimated its accounting errors total $10.8 billion, and the GSE has said it will spend $800 million on the restatement in 2006 alone. Fannie Mae and Freddie Mac buy mortgages from banking companies and then package the loans into mortgage-backed securities. Some of these securities are sold into the market, but both GSEs hold many in investment portfolios. One way to limit growth could be to restrict Fannie Mae's retained investment portfolio, which is now measured at $721 billion, down from $905 billion in 2004. Lawmakers have been fighting over how to limit these portfolios for almost two years. The House passed a bill last October that would allow a new regulator to limit the portfolios if the size threatened the safety and soundness of Fannie or Freddie. Another bill, passed by the Senate Banking Committee last July, would put stricter limits on the portfolios by prohibiting the GSEs from holding certain assets. The White House and Federal Reserve Board support the Senate plan, but several Senate Democrats have indicated they would try to block it on the floor. In December 2004, Fannie Mae's then-chairman and chief executive officer Franklin Raines and then-chief financial officer J. Timothy Howard resigned under pressure from the accounting investigations. Their departures came just three months after OFHEO's first report. Since then, there have been other instances of turnover at the government-sponsored enterprise as recently as last week. Fannie said Friday that Thomas Gerrity, a director since 1991, would leave the board by the end of the year. Gerrity has chaired the board's audit committee since 1999. This committee was a major focus of the OFHEO report due Tuesday, the sources said. Gerrity didn't return a call for comment Monday. He will be replaced by Dennis Beresford, an accounting expert and former chairman of the Financial Accounting Standards Board. While OFHEO's report is considered the most widely anticipated, other agencies are still looking into Fannie Mae, including the Justice Department and the Securities and Exchange Commission. -By Damian Paletta, Dow Jones Newswires; 202-862-9241; Damian.Paletta@dowjones.com (END) Dow Jones Newswires 05-22-06 1806ET