Sovereign Writing Down Fannie, Freddie Preferred

In a sign of how far accounting scandals at Fannie Mae(FNM) and Freddie Mac(FRE) can reach, Sovereign Bancorp(SOV) is writing down the value of some of the mortgage firms' preferred stock that the bank owns.

The Philadelphia-based regional bank said it will incur an after-tax charge of $21 million, or 6 cents a share, in the fourth quarter for the writedown. The bank said the move will have "no impact" on earnings and expects to meet or exceed the 2004 consensus estimate of $1.66 a share.

The bank said the preferred shares of Fannie and Freddie are part of its investment portfolio. Sovereign said it's taking the charge because the market value of the stock, which pays a dividend and has bond-like attributes, has declined due to the impact of the financial scandals.

But the bank said it also expects the value of the preferred shares to rise once the mortgage finance firms get their financial houses in order. Sovereign characterized the writedown as a "conservative" step on its part.

"Once regulators and the SEC have completed their review of the accounting practices of [Fannie and Freddie] and restate financial information is available, we believe the market value of these securities will improve," said Sovereign's Chief Financial Officer James Hogan, in a prepared statement.

Sovereign is one of the first banks to publicly acknowledge that it has written down the value of some of its Fannie and Freddie preferred stock. The move could spur other banks to follow suit.

The announcement from Sovereign comes a week after Fannie sold $5 billion in preferred stock to help close a $9 billion hole in its budget because of the accounting scandal.

>To order reprints of this article, click here: Reprints