- The Washington Times - Thursday, November 10, 2005


Mortgage giant Fannie Mae, struggling to untangle its accounting in an $11 billion scandal, disclosed yesterday that new errors have been uncovered as it reached outside the company to hire a new finance chief.

The government-sponsored company, which finances one of every five home-mortgage loans in the United States, also named a new chief operating officer as it again missed a regulatory deadline for filing a financial report, this time for the third quarter. Fannie Mae hasn’t filed an earnings report since late last year.

The new chief financial officer, Robert T. Blakely, is executive vice president and CFO of MCI Inc., which emerged from bankruptcy after a multibillion-dollar accounting scandal at the former WorldCom Inc.

Mr. Blakely will become Fannie Mae’s chief financial officer after completion of MCI’s acquisition by Verizon Communications Inc. That deal is expected to close later this year or early next year.

Fannie Mae also named Michael Williams, currently executive vice president for regulatory agreements and restatement, as its new chief operating officer. Robert Levin was named to the new position of chief business officer, overseeing several operations including housing and community development. Mr. Levin has been the interim chief financial officer since the management shake-up in December.

In a filing with the Securities and Exchange Commission, which has ordered the company to restate earnings back to 2001, Fannie Mae affirmed previous estimates that the correction will total about $11 billion. The company said it likely will not complete the reworking of its accounting before the second half of next year.

Fannie Mae also disclosed new accounting problems that have been uncovered in several areas, including recording losses on mortgages and the mortgage-backed securities it guarantees as well as expenses for financing some real estate investments and accounting for low-income housing tax credits and mortgage insurance. The District-based company did not provide an estimate of the amounts of the errors. They are in addition to the accounting-rule violations that came to light last year involving derivatives.

These are the financial instruments Fannie Mae uses to hedge against swings in interest rates, and its mortgage commitments. Those problems prompted federal regulators in September 2004 to accuse Fannie Mae of serious accounting problems and earnings manipulation to meet Wall Street targets.

The SEC and the Office of Federal Housing Enterprise Oversight are investigating the company’s accounting, and the Justice Department is pursuing a criminal investigation.

Additional problems are expected to come to light in the investigations by the SEC and oversight office and in Fannie Mae’s own review that has been ongoing for more than a year, company Chief Executive Daniel Mudd said yesterday in a conference call with analysts. “This is not an easy road to take,” said Mr. Mudd, who was installed by Fannie Mae’s board in December to replace ousted CEO Franklin Raines.

In its filing yesterday, the company said it had purchased at least one so-called “finite” insurance policy. The SEC and New York Attorney General Eliot Spitzer have been investigating such insurance products to determine whether they actually transfer risk to the insurers or are sold to companies to help them smooth earnings or hide losses.

Bob Maneri, a managing director of Cleveland investment fund Victory Capital Management, was unfazed by the latest revelations.

“It was not terribly surprising,” he said. “As long as it’s not earthshaking, it’s really not going to make any difference.”

Fannie Mae has been engaged in discussions with the staff of the New York Stock Exchange, which has the authority to strip a stock from trading when a company fails to file its annual report on time. The stock exchange has classified the company as a late filer and could, if it wished, delist Fannie Mae stock by year’s end.

Fannie Mae’s shares fell 1 cent to close at $46.39 yesterday on the New York Stock Exchange.

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