Fannie Mae Execs Face the Music

OFHEO has been extremely clever in its approach. Not only has it anticipated possible Fannie defenses, it also appears to be trying to get insiders over to its side. From the report, a chief culprit seems to be the Fannie accountant Boyles. But if higher-ups helped formulate dodgy accounting policies, Boyles is now very unlikely to take all the blame on his own shoulders, especially if the Justice Department is readying an investigation, as has been reported.

It is also wise to ignore any reports that the SEC has doubts about OFHEO's allegations. The SEC officials who will be working on the agencies probe of Fannie told congressional staffers that they are taking OFHEO's findings very seriously, according to Michael DiResto, press spokesman for Rep. Richard Baker, (R., La.), who is on the House Financial Services Committee and is a longtime critic of Fannie.

Josh Rosner, an analyst with Medley Global Advisors, points out another good reason why the SEC is unlikely to defend Fannie's accounting against OFHEO: Fannie's board has entered a consent agreement with OFHEO to review its books and restate past earnings and change accounting policies, if the need arises. In other words, it's hard to see the SEC rushing to the defense of a company that may soon have to restate its books.

Rosner also notes that OFHEO isn't only making allegations about Fannie's accounting. Much of its report alleges that controls at Fannie are poor, and that the possible safety and soundness deficiencies could be enough to justify the increase in capital that OFHEO has already demanded, says Rosner. (Medley Global Advisors doesn't do any investment banking, and Rosner has no positions in Fannie stock.)

Fannie really doesn't have a leg to stand on. People expect Raines to make a convincing effort in Congress to overcome the skeptics. But the evidence stacked against Fannie is so weighty that Raines may just flame out like former Enron CEO Jeff Skilling did when he tried to defend himself before Congress.