Fannie Mae Finds More Errors, Names New CFO
Friday, November 11, 2005
Fannie Mae yesterday disclosed additional accounting errors, adding to the list of problems the mortgage finance company must sort through as it tries to untangle a nearly $11 billion financial scandal that came to light last year.
The company, struggling to update its books, also said it would hire Robert T. Blakely as its new chief financial officer. Blakely is credited with cleaning up the accounting practices at MCI Inc., formerly known as WorldCom Inc., and Fannie Mae chief executive Daniel H. Mudd said he would "drive home" the same endeavor in his new job.
Fannie Mae reported both developments as part of a regular filing with the Securities and Exchange Commission, saying it will not be able to provide quarterly financial results until it finishes an ongoing audit.
News of further accounting problems had little effect on Fannie Mae's share price, which fell nearly 2 percent early in the day, then rebounded to close at $46.39, down 1 cent.
Fannie Mae has already said its earnings from previous years will be reduced by $10.8 billion because of the problems uncovered in its accounting. While that figure may change because of the new mistakes, analysts who follow the company were not concerned. They noted that most of the new information was in hand when the company's chief regulator declared recently that Fannie Mae had enough capital on hand to cover any costs that may result from its accounting review.
Blakely's appointment and Fannie Mae's improved performance during the quarter in the mortgage-backed-securities market led several to conclude the company was moving in the right direction. Fannie Mae buys mortgages and packages them into securities for resale to investors, providing cash for home lenders to make more loans.
"On balance, the information was positive," said Moshe Orenbuch of Credit Suisse First Boston LLC.
Analysts also gave the company points for candor. "Airing of accounting issues is positive," wrote Ed Groshans of Fox-Pitt, Kelton Inc.
During a conference call with analysts yesterday, Mudd said: "We will review issues in the light of day . . . and we will continue to make disclosures accordingly. This is not an easy road to take, but I believe it is the fastest road to get us to the destination that deserves your full confidence."
The accounting errors revealed yesterday concerned mortgage insurance, investments in synthetic fuel partnerships and investments in low-income housing.
Fannie Mae did not estimate the extent to which the additional errors will effect its bottom line. The company said it expects that the accounting error on the insurance policy may affect results for some previous quarters but will have "no cumulative impact" on the company's financial condition as of Sept. 30 -- the date by which the company's regulator said Fannie Mae had sufficient capital on hand to cover costs related to its accounting problems.
The company said it does not think the errors related to synthetic fuel investments will have a "significant impact," either.
Properly accounting for the investments in low-income housing, meanwhile, could change the timing of when losses from those projects were recognized.
Fannie Mae expects to complete its accounting restatement by the second half of 2006. Until then, it cannot produce accurate and complete financial statements, and as a result faces the possibility of being delisted by the New York Stock Exchange as soon as Dec. 16. However, the company said yesterday that the NYSE has asked the SEC for permission to continue listing Fannie Mae.
Fannie Mae last year was ordered to restate several years' worth of previously reported earnings after federal regulators concluded that the company had violated accounting rules. The House last month passed legislation to create a new independent regulator for Fannie Mae and its rival, Freddie Mac, with the ability to place them in receivership if they run into financial trouble and to adjust the size of their investment holdings. A similar bill in the Senate has not reached the floor for a vote.
Fannie Mae's accounting scandal led to the ouster of chief executive Franklin D. Raines and chief financial officer J. Timothy Howard and triggered investigations by the SEC and one commissioned by Fannie Mae's board, led by former senator Warren B. Rudman.
Since Howard left, Robert J. Levin, a 24-year veteran of the company, has been interim chief financial officer. Yesterday, the board said he will fill a newly created position, chief business officer. The board also named Mike Williams, executive vice president for regulatory agreements and restatement, as chief operating officer, a position formerly held by Mudd.
Fannie Mae's board is turning over as well. Thayer Capital Partners Chairman Frederick V. Malek plans to retire from the board at the end of the year, the company said. Joining the board will be Bridget Macaskill, former chief executive and chairman of the OppenheimerFunds Inc.