Fannie, Freddie Feel the Heat

This week, similar accounting tricks came to light at Fannie as OFEHO released the findings of an eight-month investigation into the bookkeeping at the nation's biggest mortgage buyer. The regulator alleges that Fannie engaged in the same kind of abusive earnings management as Freddie. The report sparked a fierce selloff in shares at both companies, emboldening their many critics and leading observers to predict a top-level management shake-up at Fannie.

On Friday, the selling in shares of both companies continued. In morning trading, Fannie was down $2.10, or 3%, to $65, while Freddie dropped 33 cents to $64.

Cliff Walk? Rocky times for Fannie, Freddie

With the accounting crisis just beginning at Fannie, there's much speculation that OFEHO will move, just as it did at Freddie, to oust the firm's management. There's a sense on Wall Street that Franklin Raines' days may be numbered as Fannie chairman and chief executive.

Fueling speculation that Fannie's directors may turn on Raines, the board on Thursday amended top execs' contracts to make it easier to withhold compensation should they be fired for cause. The board took the action after OFEHO Director Armando Falcon sent a letter to the Fannie directors warning them he is prepared to take action if they don't move swiftly in addressing the problems his agency has uncovered.

But it's not just OFEHO that Fannie and Freddie have to worry about. The latest accounting revelations are breathing new life into calls on Capitol Hill for greater control over the financial firms, which were established by the federal government to spur home ownership by guaranteeing mortgages and making a secondary market for mortgage bonds.

The critics, contending the mortgage giants have taken on too much debt and risk, want the businesses reined in. Some also maintain OFEHO has proven itself an ineffective regulator, noting that it began to crack down on Fannie and Freddie only in the face of political pressure.

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