The Wheels of Justice Flatten Fannie Mae

Politicians of all persuasions should be appalled that a company set up to indirectly help people buy their own home should have gone as far afield as it did. And the scores of legislators who benefited from Fannie's largesse should start to make amends by agreeing to the most stringent reform bill possible for Fannie and Freddie, which was the center of its own, less serious, accounting scandal in 2003.

What are the next steps for Fannie? Raines and his band of pirates will jump ship possibly by the end of this week, leaving the board the task of finding an interim CEO and management team. Given the pervasive influence of Raines within Fannie, it will take a long time to right the culture there.

Capital will have to be raised. Detox recently calculated that means rasing $11 billion to cover the $9 billion of losses, and making up a 30% capital surcharge imposed in Sept. by OFHEO. Given the massive leverage of Fannie, that could mean selling over $330 billion of mortgages. While it would be tough to offload that amount of mortgages, it's just as hard to see Fannie being able to sell billions of dollars of stock when it's not able to file accurate financial statements with the SEC.

What an absolute mess. Blame for this debacle should be liberally spread around Washington, Wall Street and in Fannie's executive suite. And if it weren't for a couple of savvy short-sellers, OFHEO, a few clear-sighted folk in the Bush administration, and, yes, the press, Fannie would still be going about its main activity for the last five years -- the wholesale destabilization of the U.S. housing market.