Heads roll at Fannie Mae
In what promises to be an ongoing top-to-bottom shakeup, Fannie Mae has fired its CEO, CFO, and auditors because:
The Securities and Exchange Commission found Fannie Mae had violated accounting rules and will need to restate earnings for the past four years. The company has said the restatement may force it to record a loss of up to $9 billion over 2001 to 2004.
That’s enough to say grace over, for anybody’s company: possibly as much as a third of its earnings over that period . The ouster was triggered first by the SEC findings, and then by pressure from Fannie Mae’s HUD Regulator, the Office of Financial Housing Enterprise Oversight (OFHEO, pronounced oh-fay-oh), because as a Government Sponsored Enterprise, Fannie Mae
enjoys a number of special benefits that have angered its rivals - including a credit line with the Treasury for as much as $2.25 billion, a lower capital standard than comparable institutions, and a widely held perception that it would be bailed out by the government.
Nor are Fannie Mae’s troubles over:
The District-based housing finance company, which stands behind or owns a quarter of the nation’s mortgages, faces a criminal investigation by the Justice Department; a civil investigation by the Securities and Exchange Commission; an ongoing probe of other accounting issues by its main regulator, the Office of Federal Housing Enterprise Oversight; and class-action lawsuits by investors.
So the executive leadership change may be only the beginning of further changes in Fannie Mae’s focus (New York Times again):
Republican lawmakers, as well as the Bush administration, have proposed a variety of changes in the oversight of the company, as well as trying to limit it from expanding into new businesses.
Because the GSEs generally, and Fannie Mae particularly, are so interconnected in the US affordable housing ecosystem that they are literally too big to be allowed to fail:
Fannie Mae, for example, has debts to bondholders of $957 billion, equal to about a fifth of the publicly held portion of the U.S. national debt. In addition, the company guarantees principal and interest payments on $1.9 trillion of mortgage-backed securities.
