- The Washington Times - Wednesday, August 9, 2006


Fannie Mae officials said yesterday a massive review of accounting errors has cleared the way for a restatement of 2004 earnings by the end of this year. The company disclosed that the multibillion-dollar correction could be less than estimated previously.

The government-sponsored company, which finances one of every five home loans in the United States, also said it would miss a regulatory deadline for filing its financial report for the second quarter of 2006. Fannie Mae hasn’t filed an earnings statement since late 2004.

Federal regulators that year accused Fannie Mae of serious accounting problems and earnings manipulation to meet Wall Street targets, and the Securities and Exchange Commission ordered the company to restate earnings back to 2001.

Last May, the federal agency that regulates Fannie Mae and its smaller government-sponsored sibling, Freddie Mac, issued a blistering report alleging a six-year accounting fraud at Fannie Mae, the second-largest U.S. financial institution after Citigroup Inc. The Justice Department has been pursuing a criminal investigation, which the company confirmed yesterday “remains open.”

The anticipated restatement of earnings has been estimated at $10.8 billion. But Fannie Mae indicated in its filing yesterday with the SEC that the final amount could be lower, because its 2004 losses related to accounting for mortgage commitments will be “significantly smaller” than its previous estimate of $2.4 billion. The company could not specify by what amount.

A Fannie Mae official said the Washington-based company has identified weaknesses in its financial controls across several areas.

It expects to spend more than $800 million this year — $286 million in the second quarter — on the complex reworking of its accounting and related expenses, including legal fees for its defense against suits filed by shareholders.

“We are committed to devoting all resources necessary to complete the restatement as expeditiously as possible,” Fannie Mae said in the filing. “However, because many of the activities are sequential in nature, accelerating the completion of the restatement is difficult.”

The company said it thinks that at this point “we have identified all errors requiring restatement.”

“We’ve made significant progress. We still do have a lot of work ahead of us,” company President and Chief Executive Daniel Mudd said during a conference call with analysts, in what has become a familiar refrain from Fannie Mae officials in recent months.

“We’ve made great strides” in restructuring the company, said Mr. Mudd, who was the chief operations official at Fannie Mae and was elevated to the top post in December 2004 when the board swept CEO Franklin D. Raines and Chief Financial Officer Timothy Howard from office.

After the restatement of 2004 earnings is completed and made public by year’s end, the company expects those for more recent periods to come “cascading” in the months to follow, Mr. Mudd said.

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