Two longtime metals traders see Comex becoming a real market for delivering gold


By Stephen Labaton
The New York Times
Wednesday, December 15, 2004

WASHINGTON -- The staff of the Securities and Exchange
Commission has ordered Fannie Mae, the nation's largest
buyer of mortgages, to restate its earnings over the last
four years after concluding that it had violated accounting
rules on its treatment of derivatives and loans.

The agency's findings, announced Wednesday evening by
Donald T. Nicolaisen, its chief accountant, is a huge
setback for the company and its chairman and chief
executive, Franklin D. Raines.

Fannie said last month that if it was found to be in
violation of the rules, it might have to report after-tax
losses on its derivatives transactions of as much as
$9 billion.

Fannie Mae was created to promote home ownership.
It does so by buying mortgages from banks that issue
them, allowing those banks to make further mortgages
and keeping interest rates low. Fannie Mae, now
privately owned, has become a giant, with about $1
trillion in assets.

Chuck Greener, the company's top spokesman, said
the decision "will have a negative impact on our
minimum capital position" but declined to quantify it.
In September, Fannie agreed to increase its capital
reserve to $9.4 billion.

"We are committed to taking the steps necessary to
comply with our minimum capital requirement," Mr.
Greener said, adding that the company would also
abide by the decision of the chief accountant. Analysts
have said that Fannie Mae could shore up its capital
by selling some of its mortgage portfolio or by a
securities offering.

Mr. Nicolaisen said that the SEC investigation of Fannie
Mae was continuing. The Justice Department is also
looking at the company's accounting.

For Mr. Raines and his top advisers, however,
Wednesday's announcement could be ominous news.
Both Mr. Raines and Armando Falcon Jr., the director of
the Office of Federal Housing Enterprise Oversight,
which has been aggressively looking at Fannie Mae,
received details about the findings in a briefing at the
commission late Wednesday.

Throughout the crisis at the company, Mr. Raines, a
former budget director in the Clinton administration,
has continued to enjoy the strong support of the
company's board. The board retained its own
lawyers, who also had not found any wrongdoing by
Mr. Raines or the senior management at the company.

But the board's confidence in Mr. Raines may now
begin to erode with the findings of the commission,
and particularly if it faces a significant restatement
of earnings. U.S. Rep. Michael G. Oxley, the Ohio
Republican who heads the House Financial Services
Committee, said on Wednesday that he would hold
hearings on Fannie Mae after Congress returns next

At an Oct. 6 hearing, Mr. Raines appeared confident
that the company would be vindicated by the SEC
and that it had been the victim of overzealous
regulators at Mr. Falcon's agency, known as Ofheo.

That agency had concluded in a report a few weeks
earlier that Fannie Mae deliberately violated accounting
rules and engaged in "cookie jar" accounting, dipping
into reserves or postponing the recognition of expenses.
The company did this, Ofheo contended, to smooth out
quarterly earnings, meet financial projections, and, in
1998, at least, earn larger bonuses for its top executives.

But Mr. Raines repeatedly assured skeptical lawmakers
at the hearing that Fannie Mae had complied with the
accounting rules and that it would be exonerated.

"I want to make one thing very clear," Mr. Raines told
the lawmakers, departing from his prepared text. If
proved wrong, he said, "our board and our shareholders
will hold me accountable; I will hold myself accountable."

Mr. Nicolaisen's statement did not address many
allegations raised by Ofheo, like irregular accounting or
manipulation of expenses and earnings to earn larger
management bonuses. But he concluded that Fannie
Mae had violated two accounting rules: one on
accounting for the costs of prepayment of loans and
another on the accounting treatment of derivatives
that the company has used to reduce risks to its
portfolio from changes in interest rates.

At the heart of the dispute between Fannie Mae and
its regulators is a complex accounting rule, known
as SFAS 133. That rule requires companies to
account for derivative securities at market value but
allows them to keep those changes from affecting
earnings if the derivatives are used to hedge
specified exposures.

The report by Ofheo concluded that Fannie Mae
rode roughshod over the rules, certifying that some
hedges were "perfect hedges" when they were not,
and in other cases treated as hedges investments
that did not qualify for the treatment. In some cases,
Fannie Mae's documentation of hedges was not
adequate, and in other cases the documents were
created retroactively, the report said.

The statement by the chief accountant at the SEC
did not go into the same detail as the report by the
housing regulator. But the statement appeared to
support its conclusions when it noted that "among
other things, Fannie Mae's methodology of
assessing, measuring, and documenting hedge
ineffectiveness was inadequate and was not

In response to the findings of Ofheo, the company's
board decided in September to increase its capital
and change the way it accounts for deferring some
expenses and hedging transactions, beginning in 2005.

Fannie Mae shares closed up 30 cents, at $70.69.


To subscribe to GATA's dispatches, send an e-mail to:

To unsubscribe, send an e-mail to:



Free sites:
(Korelin Business Report -- audio)
(In Spanish)
(In English)

Subscription sites:

Eagle Ranch discussion site:

Ted Butler silver commentary archive:



Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112

Centennial Precious Metals
3033 East First Ave., Suite 807
Denver, Colorado 80206
Michael Kosares, Proprietor

Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
Don Stott, Proprietor

El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203

Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889

178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Fax: 514-875-6484

Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
Ed Lee, Proprietor

Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
Contacts: David Schectman,
Andy Schectman, and Bob Sichel

Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614

Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877

Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
Dr. Fred I. Goldstein, Senior Broker



If you benefit from GATA's dispatches, please
consider making a financial contribution to
GATA. We welcome contributions as follows.

By check:

Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road
Manchester, CT 06043-7541

By credit card (MasterCard, Visa, and
Discover) over the Internet:

By GoldMoney:
Gold Anti-Trust Action Committee Inc.
Holding number 50-08-58-L

Donors of $750 or more will, upon request,
be sent a print of Alain Despert's colorful
painting symbolizing our cause, titled "GATA."

Donors of $200 or more will receive a copy
of "The ABCs of Gold Investing" by Michael
Kosares, proprietor of Centennial Precious
Metals in Denver, Colorado.

GATA is a civil rights and educational
organization under the U.S. Internal Revenue
Code and contributions to it are tax-deductible
in the United States.