Franklin and the Benjamins
Fannie's Rainesy Days

1. Howard's End

Everything's just fine and dandy at

Fannie Mae

(FNM)

, thank you very much.

The big mortgage company this week trumpeted the findings of an inquiry into Fannie's brush with bookkeeping ignominy. Fannie's board commissioned the study after regulators demanded an earnings restatement that could end up lopping $11 billion off previously reported profit.

The report concludes that yes, Fannie's accounting practices departed from generally accepted principles. Yes, Fannie Mae's accounting department was dysfunctional in the extreme. Yes, everyone was pretty much obsessed with hitting quarterly earnings targets, whatever the cost.

But the report purrs soothingly that the actual misstatements were mostly the doing of two rogue former finance execs, notably former finance chief Tim Howard. "No member of management who we found knowingly participated in improper conduct continues to be an employee of the company," the report says.

The blue ribbon panel, led by former Sen. Warren Rudman, adds that since September 2004 "there has been a dramatic shift in the 'tone at the top' and the company's internal organization."

Of course, that shift might be linked to the departure of former chief Franklin Raines. It was Raines who loudly defended Fannie's accounting missteps throughout 2004 even as the regulators at the Office of Federal Housing Enterprise Oversight were bringing them to light. Raines finally stepped down at the end of that year after the

Securities and Exchange Commission

definitively

ruled Fannie's accounting was wrong.

The Rudman report concludes that Raines "contributed to a culture that improperly stressed stable earnings growth and that, as the chairman and CEO of the company from 1999 through 2004, he was ultimately responsible for the failures that occurred on his watch." But it says there is no evidence that Raines knew directly of the accounting missteps.

The report's wishy-washy take on Raines is hard to square with the CEO's chest-thumping testimony in October 2004, when he was so eloquent in describing Fannie's supposedly formidable internal controls.

"I receive reports about the financial statements, accounting policy developments, key disclosures, and any internal control considerations," Raines told Congress. "The CFO and I ensure that any questions raised during this session are answered prior to finalizing the report. ... Then the Board's Audit Committee reviews the draft report, and holds a conference call with senior management, and attended by KPMG, to discuss the report and results of our due diligence session." Only then would he sign off on the financials, he claimed.

"These findings are disturbing, disappointing and very serious," Fannie's chairman, Stephen Ashley, said of the Rudman report. "But big problems brought to light can teach big lessons."

Like don't hire Frank Raines as your CEO.

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Dumb-o-Meter score: 88. "Fannie Mae is a different company than a year ago," CEO Dan Mudd said. Well, let's hope so.

To view Colin Barr's video take on Martha Stewart's entry in Five Dumbest this week, click here

.

Content With Their Content
Viacom, CBS spin dud reports

2. Endless Sumner

CBS

(CBS) - Get Report

and

Viacom

(VIA) - Get Report

have gone their separate ways, but their head honchos still speak the same language.

This week the two New York media giants posted their first earnings reports as independent companies, following their year-end split-up. The results were unimpressive, with CBS suffering a $9 billion asset writedown and Viacom missing profit targets by a dime a share.

In some ways, the weak numbers came as no surprise. Though the new CBS and the remade Viacom have all the trappings of independence, they remain very much part of Sumner Redstone's empire. He is chairman at both companies and remains their controlling shareholder. His daughter Shari is nonexecutive vice chairman.

Embracing the spirit of Redstone's old, underperforming Viacom, execs at both companies this week rushed to dress up their dismal data.

"Our strong results show that, even as Viacom prepared for the split of the company at the end of 2005, our team was able to keep its eye on the ball, and perform well for yet another quarter," said Viacom CEO Tom Freston.

"I am very pleased that the separation is completed, and we start the new year with clear decks and tremendous focus and energy," said CBS chief Leslie Moonves.

For his part, the 82-year-old Redstone rhapsodized about smooth execution and rapid progress. Best of all, though, "adding to all that is a constantly growing mountain of content that generates revenue through established and emerging platforms," he said.

That sounds like a mountain of something, but content isn't what we had in mind.

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Dumb-o-Meter score: 79. Clear decks are important if you're going to lose $9 billion in a quarter.

Martha's Homespun Quarter
Rare profit Trumps trifle

3. Homey Touch

Martha Stewart Living

(MSO)

had a nice homey feel about it this week.

On Wednesday, the media company posted a rare quarterly profit and agreed to extend its collaboration with KB Home (KBH) - Get Report.

The news sent Martha Stewart Living shares up 12%, reversing a months-long slide into the teens. The stock fetched $35 or so only last summer, when founder Martha Stewart was finishing up a six-month stretch under home confinement.

The KB partnership calls for a new line of housewares called Martha's Choices. Items will include floor coverings, door selections, hardware, closet organizers, lighting fixtures, bathroom fixtures, kitchen cabinets and window treatments, expected to be available by spring 2007. The move extends the huge Stewart brand, which already features a show on Sirius (SIRI) - Get Report and a scrapbooking arm.

"We learned so much creating the homes in Cary, N.C., and are eager to share these unique home solutions and innovations to many more consumers," Martha Stewart said. "Martha's Choices items will give homeowners a broader choice of functionality and style in important areas of the home from flooring to kitchen and bathroom faucets to lighting fixtures."

In addition to pumping up the stock, the good news helped to deflect some attention from Stewart's clash with reality TV juggernaut Donald Trump. Stewart told

Newsweek

she blamed Trump for the poor performance of her "Apprentice" spinoff, on grounds that she was denied a chance to fire Trump. Surprisingly, Trump shot back in a heartfelt letter that somehow ended up being leaked to the media. "Essentially, you made this firing up, just as you made up your sell order of

ImClone

(IMCL)

," he screeched.

So maybe firing the Donald just isn't one of Martha's Choices.

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Dumb-o-Meter score: 78. No word on whether Martha-branded ankle bracelets will be on offer.

4. Stunner

Taser

(TASR)

sure knows how to zap its foes.

The Scottsdale, Ariz., company said Wednesday that

fourth-quarter earnings plunged 98% from a year ago. The stock has lost two-thirds of its value since December 2004, amid safety questions and legal wrangles.

But Taser is nothing if not defiant.

"The challenges of 2005 have only made us stronger as a company," said CEO Rick Smith. "We faced these challenges, improved our core business operations, furthered our industry leading research and development programs and remained profitable. Qualitatively, we are feeling a shift in momentum in our favor."

Skeptics might wonder about the future of a company whose sales dropped 34% from a year ago in the latest quarter. But along with Smith's momentum shift, Taser points to its prowess in the courthouse.

"We would also like to point out to our shareholders that our strategy of aggressive litigation defense is clearly working," said Chief Counsel Doug Klint. "We have sent a strong message to plaintiff litigators across the country: if you intend to litigate with Taser International, understand that we will fight all the way. We will bring dozens of world class experts that understand and can clearly articulate the safety of our technology and debunk false claims.

"And we will go so far as to settle with our own insurance provider rather than allow a plaintiff settlement if we believe the claims are without merit," Klint continues. "In fact, in the Powers case, the company will receive $575,000 in cash from this strategy -- money which we believe will be booked as earnings upon final resolution of any appeal issues in our favor."

Clearly, anyone who takes issue with Taser is courting disaster.

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Dumb-o-Meter score: 75. That legal recovery is surely reason to take heart.

5. Canada Goose

Sears Holdings

(SHLD)

doesn't deal well with rejection.

The big retailer said it was "disappointed" this week after independent directors of its Sears Canada unit voted not to recommend a buyout at 16.86 Canadian dollars a share. Hoffman Estates, Ill.-based Sears Holdings owns 53% of Sears Canada and is making a tender offer for the rest.

The Sears Canada directors say the fair value of the company is above C$20 a share. As a result, a third-party opinion "states that the Sears Holdings Offer is inadequate, from a financial point of view, to Sears Canada's minority shareholders."

Sears took issue with the third-party valuation, rendered by Genuity Capital Markets. It said it stands behind its offer and adds that shareholders of Toronto-based Sears Canada should consider the following points:


  • Last fall, Sears Canada execs sold "over 60% of their holdings at an average price of C$13.58," adjusting for a big dividend;
  • The Sears Canada outside directors "have failed to purchase any shares of Sears Canada in the last three years," except for a single thousand-share purchase in 2004; and
  • Sears Canada has bought back less than 1% of its stock over five years, suggesting execs didn't believe the stock was undervalued.

"We have owned over 53% of Sears Canada for more than 20 years and, if necessary, we are comfortable continuing to own less than 100%," says Vice Chairman Alan Lacy, noting that the tender offer ends next month.

Given all that, it's a wonder that Sears Holdings wants to own any of Sears Canada.

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Dumb-o-Meter score: 72. Why are independent directors always so disappointing?

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