Ted Butler: Don''t look now but the real gold is silver

Section:

By Robert Schroder
CBSMarketWatch.com
Tuesday, December 21, 2004

http://cbs.marketwatch.com/news/story.asp?guid=%7B35A246BA%2D60C9%
2D4C7B%2D803E%2D89682C5A4CB4%7D&siteid=mktw&dist=

WASHINGTON -- Mortgage finance giant Fannie Mae
dismissed Chief Executive Officer Franklin Raines and
Chief Financial Officer Timothy Howard late Tuesday
in the wake of accounting errors that will force a
massive earnings restatement.

Fannie executives came under intense pressure after
last week's U.S. Securities and Exchange Commission
finding that the company violated accounting rules
related to the hedging of its derivatives. The company
has said that it may be forced to take a $9 billion loss
if it restates earnings from the past four years.

"Fannie Mae's Board of Directors takes these steps
today to move the company forward to serve its critical
mission in a safe and sound manner," said board
member Ann Korologos.

The spotlight has focused intensely on Raines and
Howard, who defended the company's accounting
practices at an October congressional hearing.

Raines said late Tuesday night that he believed the
company had behaved correctly.

"Although, to my knowledge, the company has
always made good-faith efforts to get its accounting
right, the SEC has determined that mistakes were
made," he said. Raines told lawmakers in October
he would take responsibility if accounting
inaccuracies were found.

The episode marked a low point in Raines's otherwise
luminous career. One of the country's top Democrats,
he served as President Bill Clinton's budget director
and is well-connected on Capitol Hill.

Fannie's regulator also announced Tuesday that the
company is "significantly undercapitalized" for the
third quarter of 2004. The Office of Federal Housing
Enterprise Oversight said it will work with Fannie to
boost its capital reserves.

Sanford Bernstein analyst Jonathan Gray said the
company remains an attractive long-term investment
even after a management purge.

A change of officers "will not alter the company's
fundamental character and health and growth," Gray
said Tuesday. Gray owns shares of the
Washington-based company, which holds nearly $1
trillion in assets.

Raines' job as chairman and chief executive officer
will be divided, with Fannie Mae director Stephen
Ashley serving as non-executive chairman of the
board and chief operating officer Daniel Mudd serving
as interim chief executive officer. Fannie Mae
executive vice president Robert Levin will replace
Howard on an interim basis.

Fannie Mae also dismissed its auditor, KPMG.

Last Wednesday, the SEC agreed with OFHEO that
the company had violated accounting rules. The
SEC's investigation is ongoing, and the Justice
Department is conducting its own probe. The
company also faces numerous lawsuits lodged by
shareholders.

OFHEO Director Armando Falcon Jr. immediately
praised Fannie's actions Tuesday night.

"We are encouraged that the board's announcement
signals a new culture and a new direction for Fannie
Mae," he said.

Fannie shares closed up 93 cents in Tuesday trading,
to $70.35.

Congress created Fannie Mae to help low and middle
income families buy homes. But the special relationship
between the government and the company has led some
in Congress to criticize the company as too big and
risky to taxpayers. Two congressional committees have
planned hearings for next year about a stronger regulator
for Fannie.

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