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$1.2 Billion Fannie Error Helps Case for More Oversight

Fannie calls it "honest mistake" in implementing FAS 149

October 31, 2003

By PATRICK CROWLEY


When Fannie Mae makes a mistake, it's a doozy.

The government-sponsored mortgage company has acknowledged making a $1.2 billion error in calculating its third-quarter earnings, blaming the "honest mistakes" on "computational errors" used in implementing new accounting standards, the company said in a statement.

"There were honest mistakes made in a spreadsheet used in the implementation of a new accounting standard," Jayne Shontell, Fannie Mae senior vice president of investor relegations, said in a statement released Thursday. "The bottom line is that the correction has no impact on our income statement, but resulted in increases to unrealized gains on securities ($1.279 billion), accumulated other comprehensive income ($1.136 billion) and total shareholder equity ($1.136 billion)."

"The correction had to do with a computational error in performing complicated calculations required in the implementation" of Financial Accounting Standards (FAS) 149, which was issued April 1, Shontell said.

Shontell said the company continues "to be proud of our accounting processes and controls."

"Far from being a failure of our accounting system, this event demonstrates that our accounting processes and controls work as they should," she said.

But reaction to the snafu was fast and fierce, especially considering that Freddie Mac, Fannie's smaller cousin, reported massive accounting problems earlier this year.

Just last week four more people -- three vice presidents and a trader -- left Freddie in the wake of revelations that the company understated past earnings by $4.5 billion. All told, 10 people have been forced out of the company, including former CEO Leland C. Brendsel.

"Here we go again," Rep. Richard Baker, R-LA, said in a statement. "First Freddie, now Fannie, and here's Fannie, just like Freddie, after announcing a bigger than $1 billion accounting error, asking us to believe it's no big deal.

"Nevertheless, I hope they'll excuse me if I'm more than just a little bit concerned about this," said Baker, chairman of the House subcommittee on Capital Markets, who called for a Congressional probe of Fannie's and Freddie's books.

"Before something calamitous occurs, Congress must demand professional oversight to give us the straight facts about these companies' books," Baker said. "Which is precisely why I asked the General Accounting Office to investigate. And in light of this new development, I expect to hear from GAO officials this week.

"We've had a decade to debate strengthening (government sponsored enterprises) oversight before it's too late," he said. "Time has run out. We need to act now."

The error is an indication that more oversight of the agencies is needed, said Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both companies.

In a statement, Falcon said he was concerned over Fannie's reliance on "manual accounting systems."

"This error underscores the need for the special review (the agency) is about to begin of accounting policies, practices and internal controls at Fannie Mae," Falcon said. "This development also adds urgency to congressional approval of the additional 2004 resources requested by the White House for (OFHEO) to fund this special examination and strengthen our staff and oversight."

Bert Ely, a financial institutions consultant based in the Washington area, said the error "raises all kinds of questions ... about the way they bungled this."

"If the explanation is that they do calculations by hand (on a spreadsheet) they could have written a computer program to" calculate the accounting changes, Ely said. "There is something more to this, I just don't know what it is."


Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]

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