Updated from 12:34 p.m. EST

Scandal-tarred

Fannie Mae

(FNM)

on Wednesday took its first step toward raising the $9 billion it will need to put its books in order, announcing a plan to sell $4 billion in preferred stock.

The nation's biggest mortgage finance firm said Wednesday that it is considering selling the shares in two private placements to institutional buyers. One of the planned offerings might be convertible into Fannie's common shares, while the other will pay a floating rate dividend. The offerings could price and be sold to investors by the end of the week.

A convertible offering could be further bad news for Fannie investors. A flood of new shares into the market could depress the price. In late-morning trading, shares of Fannie were trading slightly lower, down 11 cents to $69.73.

Fannie offered no formal reason for the sales, but many believed the mortgage company would be forced into the public markets in the wake of the accounting scandal that led to the ouster of CEO Franklin Raines. The company is also thought to be considering suspending its dividend and selling off some of its giant mortgage portfolio to raise cash.

Fannie has been in a turmoil since the

Securities and Exchange Commission's

top accountant ordered the company to restate its earnings for the past four years. The SEC effectively ratified the findings of the Office of Federal Housing Enterprise Oversight, which concluded that the government-sponsored entity used improper accounting methods for valuing derivatives -- sophisticated financial instruments the company uses to hedge against interest rate swings.

The faulty accounting could force Fannie to report after-tax losses on its derivatives transactions of as much as $9 billion. Some analysts say the final sum could be even higher.

The big losses are critical to Fannie, since the company is required to comply with a minimum capitalization standard set by OFHEO, the company's primary regulator.

Lehman Brothers

(LEH)

, meanwhile, will be the sole placement agent for the two stock offerings, according to a Fannie spokesman. The company's last preferred stock offering was in September 2003, raising about $285 million.

Mike McMahon, an analyst with Sandler O'Neill, says the timing of the preferred stock sale is earlier than he expected, but he considers it a smart move. He says Fannie needs to come into compliance with OFHEO's minimum capital requirement as soon as possible. McMahon says Fannie also need to show Congress, which intends to hold hearings on the accounting scandal early next year, that it is serious about addressing the company's problems.

McMahon, however, discounts the negative impact the new offering will have on the Fannie's shares. He says much of the "doomsday'' scenario for the stock is already priced into its shares.

Critics, however, would quarrel with McMahon's assessment. For the year, Fannie's shares are only down 4%. Some say Fannie's stock could fall even farther if more accounting problems are discovered at the mortgage giant during the restatement process.

Fannie recently fired its former auditor KPMG and is trying to find a new firm to review its books.

Fannie's regulatory problems, meanwhile, are far from over. The SEC and the Justice Department are continuing to investigate the accounting irregularities at the company. OFEHO is looking into the big pay packages awarded to Raines and other top managers.