Fannie Mae's Fearsome Challenge

Thankfully, we don't have to rely fully on OFHEO. Members of Congress are also trying to pry very important information from Fannie. One absolutely critical number that Fannie has refused to divulged is the amount of unrecoverable losses it has sitting in its equity. They could amount to well over $5 billion, due to the devil-may-care manner in which Fannie has hedged against interest rate movements over the past three years. Sen. Chuck Hagel, who has introduced a bill to toughen regulation of Fannie and Freddie, has asked Fannie to supply him with the actual number of unrecoverable losses.

If Fannie answers Hagel's question and the unrecoverable losses are large, the credibility of CEO Raines and his team will plunge overnight. Not so much because they masked the losses for so long -- which would be bad enough -- but because they managed Fannie in such a risky manner that the company ended up booking such huge losses. (Conveniently, such losses don't run through the income statement all at once, but are amortized in slowly over time, and the actual amortization amount isn't broken out.)

Alternatively, a refusal by Fannie to give Hagel the realized loss number would be a clear sign that the company could be embarrassed by its size. If it claims it can't calculate the number, it would show that its systems are even worse than Freddie's.

Yep, there's no way Fannie can avoid a bruising encounter with the truth in 2004.

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