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Fannie Improperly Accounts for Securities, Ofheo Says

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UpInArms Donating Member (1000+ posts) Send PM | Profile | Ignore Thu May-06-04 07:47 PM
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Fannie Improperly Accounts for Securities, Ofheo Says

May 6 (Bloomberg) -- Fannie Mae, the largest buyer of U.S. mortgages, improperly accounted for some bonds backed by manufactured housing and aircraft leases, and must further write down the value of the investments, its federal regulator said.

``The current accounting of Fannie Mae does not reflect the earnings volatility associated with these assets, does not best reflect actual economic performance and does not recognize on a timely basis impairments of the portfolio,'' Armando Falcon, the director of the Office of Federal Housing Enterprise Oversight, said in a letter to Fannie Mae Chief Executive Franklin Raines.

The regulator's effort to uphold what it called ``the proper accounting standard'' follows an acknowledgement by Freddie Mac six months ago that it understated earnings by $5 billion from 2000 until 2002. The company, Fannie Mae's smaller rival, sought to reduce earnings volatility, according to a December report by the regulator, known as Ofheo.

``This is another case where in the eyes of Ofheo there was misinterpretation of accounting rules,'' said Hilary Hayes, an analyst at Victory SBSF Capital Management, which last quarter sold its 950,000 shares of Fannie Mae. ``The next question is: what is the magnitude of the correction?''

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54anickel Donating Member (1000+ posts) Send PM | Profile | Ignore Thu May-06-04 09:26 PM
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1. Fannie and Freddie, what a pair. Didn't Fannie recently put off reporting
their derivatives again? Sheesh, and Greenspan doesn't want them regulated by the SEC.

NEW YORK, April 19 (Reuters) - Fannie Mae delayed the release of closely watched balance sheet and derivatives disclosures on Monday, citing the difficulty of preparing the information and its desire to explain it more fully in an upcoming regulatory filing.

Fannie Mae (FNM.N: Quote, Profile, Research) said it will release information on losses from derivatives used to hedge swings in interest rates and the impact on stockholders' equity, among other disclosures, in its quarterly filing with securities regulators in about three weeks.

Fannie Mae previously had included some details of its derivative losses and total stockholders' equity in a report of "selected financial information" released each quarter, along with its earnings statement.

The future impact of most derivatives on earnings -- seen in a balance sheet line item known as "accumulated other comprehensive income," or AOCI -- has received a lot of attention recently from critics who charge the company has downplayed potentially big losses, either from bad bets or poor interest-rate hedging.


While we're on the subject

Fed's Poole worried about risk of crisis from housing GSEs

WASHINGTON (CBS.MW) - The capital positions of Fannie Mae and Freddie Mac and their quasi-government status remain a lingering threat to financial markets, William Poole, the president of the Federal Reserve Bank of St. Louis, said Thursday.

In an address to a banking conference sponsored by the Federal Reserve Bank of Chicago, Poole, a frequent critic of the housing government-sponsored enterprises, or GSEs, sharpened his previous attacks on the firms.

A copy of his remarks was made available in Washington.

He argued that, underneath all of the complicated accounting and complex derivative strategies, the problem of Fannie Mae (FNM) and Freddie Mac (FRE) boils down to a simple fact - the firms pursue a strategy of borrowing short and lending long with a thin capital margin.

"In my opinion, GSE capital positions are undesirably thin and leave these firms unnecessarily vulnerable to surprise shocks," Poole said.

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