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Speculation Drops Fannie Stock

Report Says Restatement Might Cost an Additional $2.8 Billion

By Terence O'Hara
Washington Post Staff Writer
Friday, March 4, 2005; Page E03

Fannie Mae's stock lost ground yesterday after a week of volatile trading and speculation about the full financial impact of its accounting problems.

On Feb. 23, the mortgage giant said its federal regulator had identified several new problems with how Fannie Mae applied accounting rules for its $890 billion mortgage portfolio.

Fannie stock fell $1.10 yesterday to close at $58.51 on heavy trading. Since the Feb. 23 announcement, the stock had actually risen more than $2 a share, and it remains more valuable than a week ago.

But yesterday the Wall Street Journal, relying on an accounting expert, said one aspect of the accounting problems Fannie revealed last week could result in a $2.8 billion reduction in profit as of June 30 last year. That would be on top of more than $9 billion Fannie has already said it expects to have to subtract from reported earnings since 2001 because of previously disclosed failures to follow certain accounting rules.

Several analysts who follow Fannie Mae said that the $2.8 billion figure represents a worst-case scenario or that it is impossible to determine the final outcome of the restatement given the scanty details the company disclosed last week. Fannie Mae did not make any estimate of the financial effect of the new accounting issues. Company spokesman Charles V. Greener yesterday declined to comment.

"The bottom line is we just don't know," said Edwin Groshans, who follows Fannie's stocks and bonds for Fox-Pitt, Kelton Inc. "This used to be one of the more active communicators [with Wall Street analysts]. Now, they're completely shut down. It's just, 'No comment.' And in the absence of any real information, in an environment like this, the bears always win."

Downward pressure on Fannie's stock may have been increased yesterday by a report from Morgan Stanley analyst Kenneth A. Posner, who predicted that it would lose value in the short term. At the same time he predicted that shares of Fannie competitor Freddie Mac, which has a two-year jump-start on Fannie in dealing with its own accounting issues and is well capitalized, would increase in value.

"Today's story in the Wall Street Journal claiming that the company will have to write off additional derivatives losses is simply a reminder of the current state of affairs," Posner wrote. "Freddie is, we believe, well past that point."

Freddie Mac's stock, which often trades in tandem with Fannie, fell yesterday as well, to $63.20, down 55 cents.

Fannie and Freddie were chartered by Congress to provide a stable source of cash for the home mortgage markets. The companies are the biggest buyers and guarantors of home loans from banks, savings and loans, and other mortgage lenders. They keep some of the mortgages they buy but sell others in the form of bonds or mortgage-backed securities.

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