Trace of honesty in U.S. inflation report stuns economists


By Marcy Gordon
The Associated Press
Tuesday, November 16, 2004

WASHINGTON -- Fannie Mae's accounting crisis has taken
a turn with its outside auditor KPMG refusing to sign off on
its third-quarter earnings report, causing the mortgage giant
to miss a regulatory deadline for filing it.

Fannie Mae, whose accounting is under investigation by the
Securities and Exchange Commission, also said Monday
that if the agency finds that it has improperly accounted for
derivatives -- the financial instruments it uses to hedge
against interest-rate swings -- it would show an estimated
net loss of $9 billion for the July-September period. And it
acknowledged that some of its accounting policies do not
comply with generally accepted accounting principles.

Washington-based Fannie Mae, which finances one of
every five home loans in the United States, disclosed the
SEC investigation on Sept. 22, stunning investors.

The company, recently cited by regulators in the Office of
Federal Housing Enterprise Oversight for serious accounting
problems and accused of earnings manipulation, notified the
SEC Monday that it would not file the third-quarter report on

The OFHEO regulators had ordered Fannie Mae to make
massive recalculations, and the delay fueled speculation
as to whether the company would restate earnings.

SEC spokesman Matt Well declined comment on the filing
as did Corinne Russell, a spokeswoman for OFHEO, an
independent agency within the Department of Housing and
Urban Development. Spokesmen for Big Four accounting
firm KPMG could not be reached for comment Monday.

In its filing notifying the SEC, Fannie Mae said it 'is not
able to file a timely (quarterly report) that complies with the
SEC's rules because it has been advised by its independent
auditor that it is unable to complete its review of Fannie
Mae's interim unaudited financial statements for the quarter
ended September 30, 2004.'

Fannie Mae also acknowledged that some of its accounting
policies do not comply with generally accepted accounting
principles, apparently contradicting recent public statements
by top executives who have defended the company's

Chief executive Franklin Raines and Chief Financial Officer
Timothy Howard insisted in sworn testimony at a congressional
hearing last month that the HUD regulators' allegations of
accounting improprieties and management misdeeds going
back to the late 1990s were a matter of interpreting complex

In its filing Monday, the company said it 'recently determined
that its methodology for performing' some calculations for 2001
and 2002 balance sheets 'was not consistent'' with generally
accepted accounting principles. It said it expects the effect of
the discrepancies will be an increase in earnings for 2001 and
2002, and a decrease in 2003 profits, 'with the cumulative
effect of these changes across the three periods netting to

The 'catch-up'' calculations in question were related to 1998
expenses that OFHEO had said the company incorrectly put
off to future periods so that top executives could collect full
annual bonuses.

The stakes are high for Fannie Mae, the second-largest
financial institution in the country behind Citigroup, which
also faces a criminal investigation by the Justice Department.

The SEC inquiry makes things potentially tricky for Fannie Mae.
Also by law, the quarterly financial reports must be certified in
writing by Raines and Howard.

If the SEC investigators turn up accounting violations in the
quarter, that could expose Fannie Mae and its executives to
legal liability with shareholders and others, some analysts say.

A restatement could lead Fannie Mae's board to shuffle the
company's executive ranks.

Fannie Mae and its smaller sibling Freddie Mac pump money
into the home mortgage market by buying and guaranteeing
repayment of billions of dollars of home loans each year from
banks and other lenders, then bundling them into securities
that are resold to investors. Their stock and debt are widely
held by investors worldwide.


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Dr. Fred I. Goldstein, Senior Broker



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