Alleged new accounting problems won't shake Fannie's core business

Fannie Mae’s alleged new accounting problems won’t shake its core business, a top Federal Reserve official said Tuesday, according to media accounts.

“I don’t see anything in these reports that suggests a solvency issue,” St. Louis Federal Reserve Bank President William Poole told Reuters after making a speech. Fannie’s shares plunged last week after Dow Jones published a report saying regulators found new accounting violations at the mortgage giant.

Fannie Mae is already under scrutiny for alleged bookkeeping irregularities that could force the company to restate earnings by as much as $12 billion.

A spokeswoman for the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae, would not confirm or deny last Wednesday the report that the regulator has found extensive additional problems.

Poole told reporters the issue really served to underscore his longstanding argument that government sponsored enterprises Fannie Mae and Freddie Mac need more regulation, Reuters reported.

“It probably doesn’t shake the core business. Fannie Mae is still well enough capitalized,” Poole said, according to reports. “What it does do is to add to the case for fundamental reform.

“These firms create a continuing systemic risk to the economy…The scale is so immense,” said Poole.

Fannie Mae investigators are pursuing an inquiry into an estimated $10.8 billion in accounting errors at the mortgage giant, led by former U.S. Sen. Warren Rudman.

OFHEO is reviewing Fannie Mae’s books after accusing the company of misapplying accounting rules.

The agency last year uncovered accounting violations at Fannie Mae, setting off investigations by the Securities and Exchange Commission and the U.S. Justice Department and several shareholder lawsuits. As a result, the company will have to restate earnings by as much as $12 billion.

In December 2004, Fannie Mae replaced Franklin Raines, its chairman and CEO, who announced he was taking early retirement, and Fannie Mae’s chief financial officer, Timothy Howard, resigned Dec. 21.

Fannie Mae’s financial accounting troubles have drawn shareholder lawsuits and investigations by the Justice Department and the Securities and Exchange Commission.

Freddie Mac, Fannie’s fellow major government-sponsored enterprise, also experienced a management shakedown in 2003 when accounting irregularities surfaced. The company has since restated several past years’ earnings amounting to approximately $5 billion. And The Office of Federal Housing Enterprise Oversight fined the company $125 million.

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