The Wheels of Justice Flatten Fannie Mae

Fannie, with over $1 trillion of assets, is going to be plunged into a turmoil and it will soon have to operate under much stricter regulation. The SEC's decision will make it very easy for the Bush administration to get congressional backing for a package of reforms for Fannie and the other government sponsored mortgage giant, Freddie Mac (FRE Quote). Fannie had managed to mount a huge lobbying campaign to squash attempts during the first Bush term to legislate reforms.

The administration aims to have a bill moving through Congress by April, according to a person familiar with the administration's thinking.

And it will find a much more receptive environment. Following the SEC's opinion on Fannie, House Financial Committee Chairman Michael Oxley (R, Ohio) said Wednesday night that his committee wanted to work toward "sweeping legislative reform."

Investors shouldn't expect up-to-date financials for many months.

'Wheels of Justice'

There has always been a small cadre of Fannie skeptics, who often managed to get their arguments out despite the attempts of Wall Street to defend the company. One of the leading Fannie critics, Lawrence Kam of Sonic Capital, said: "I commend the professional staff at OFHEO and the SEC. The wheels of justice sometimes move slowly, but they move." (Sonic has sold Fannie shares short, meaning it will benefit from any decline in their value.)

In addition, this column has long warned investors that Fannie had big problems with its accounting and with its derivatives losses. It also highlighted the reckless and self-serving moves by the Raines-led management team.

Yet, despite the ugliness of the $9 billion of losses and the unmistakable frankness of the SEC's remarks, there will be many who will deny the Fannie scandal is as big as Enron's or WorldCom's. While it likely won't lead to the bankruptcy of Fannie, the scandal is as bad, and in some ways it is actually worse. Here's why.