Fannie Hit by Accounting Report

The stock drops 11%.
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Fannie Mae

plunged 11% late Wednesday after

Dow Jones

reported that investigators probing the mortgage giant's accounting had uncovered "pervasive" accounting violations.

The report, which cited unnamed sources "close to, or who have been involved in, the inquiries," alleges that Fannie execs embellished the company's earnings over the years by overvaluing its assets, underreporting credit losses and misusing tax credits.

The report says Fannie's accounting violations helped the company "to conceal losses over the years,"

Dow Jones

reported. The report said Fannie's restatement is likely to show bigger losses than previously disclosed.

Reuters

reported that officials at the Office of Federal Housing Enterprise Oversight, Fannie's main regulator, didn't comment on the report. But OFHEO said later Wednesday that the mortgage finance firm is "adequately capitalized'' based on the figures provided by Fannie. Even so, OFHEO said it is "not disclosing the analysis of Fannie Mae's capital results'' due to the ongoing accounting review. Specifically, OFHEO said that Fannie, through a combination of "earnings retention and asset sales'' had exceeded the minimum capital requirements by $5.9 billion.

Regulators led by former OFHEO chief Armando Falcon last year forced Fannie to change its derivatives accounting, leading to the demise of the company's previous management, led by CEO Franklin Raines. The company has since failed to file timely financial reports while indicating its restatements could mount well into the billions of dollars.

TheStreet.com's

Peter Eavis

predicted the company's problems in columns running back to 2003.

On Wednesday, Fannie slid $4.95 to $41.75.