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This column was originally published on RealMoney on Sept. 29 at 7:43 a.m. EDT. It's being republished as a bonus for readers.

It's going to be very interesting over the next few days and weeks to see who comes to the defense of

Fannie Mae

( FNM), the badly wounded mortgage lending giant that weathered a new blow on Wednesday.

So far, it looks like the Wall Street investment banks that have been its counterparty or underwriter on hundreds of billions of dollars worth of swaps, bonds and assorted exotic securities are maintaining an eerie, disquieting silence.

The most recent hit came late in the day Wednesday, when

Dow Jones Newswires

reported that investigators studying Fannie Mae finances have found evidence that the company may have overvalued assets, underreported credit losses, misused tax credits and purchased "finite insurance" to hide shortfalls. Quoting anonymous sources, the report said there were indications that the new accounting violations "were designed to embellish the company's earnings" and are in addition to the violations that the company and its regulator have already disclosed.

The story kicked off an 11% plunge in Fannie Mae shares, its biggest decline since the 1987 crash. The stock closed at $41.71, near its 52-week low, with few buyers apparently willing to step in and aggressively buy at the close.

Little wonder. If the story is accurate -- and there's no reason to suspect it isn't, as the reporter has done a good job of covering Fannie for some time -- it may be a bombshell. These are the kind of allegations that could move the story out of the realm of mere incompetence and fair-minded disputes of accounting arcana, and closer to potential fraud.

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To take just one example, finite insurance is, very glibly, the practice of borrowing money from an insurance company for awhile so you can categorize it as revenue or reserves, then paying it back. The game, as uncovered by New York Attorney General Eliot Spitzer, has been revealed elsewhere to be an elaborate Ponzi scheme used to either to hide losses and deceive investors about the erratic nature of quarterly income, or to falsely shore up reserves.

For years, Fannie Mae's former chief executive Franklin Raines proudly told investors that Fannie Mae had an unbroken record of annual income growth of around 15%. But as most savvy investors know, there is virtually no legitimate way to post a perfect growth record in the financial services business.

There will always be up quarters and down quarters, and up years and down years, as the economy ebbs and flows. Warren Buffett has long disparaged the notion that a company should even aspire to produce a seamless earnings stream, in part because he recognizes it is impossible to achieve without accounting sleight of hand.

To be more blunt, if the charges stick, Fannie Mae will stand accused of tricking investors large and small into thinking it had earnings that it didn't. That could open the company to years of lawsuits from the securities bar not just here, but also in Europe and Asia, where U.S. agency debt has been a core holding. If you thought pharmaceuticals maker


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had become a trust fund for lawyers and litigants in the wake of its Vioxx mess, just wait til you see what happens with Fannie if this scenario plays out. A bank has virtually nothing but its credibility and financial strength to sell -- no drug pipeline, scientists or patents. Without its implicit government guarantee, Fannie's very survival may be in question.

Disquieting Statements of Support

On Wednesday night, a couple of major brokerages waded out with tepid opinions that showed they didn't know quite what to do in this situation, considering they had been the company's cheerleader for so long. This response recalled their deer-in-the-headlights reaction to unfolding revelations of Enron's misdeeds.

Morgan Stanley analyst Kenneth Posner sent a note to clients that continued to list a price target for Fannie Mae stock at $67, yet stated: "While our target price for Fannie shows significant upside potential, it will be a year or longer before we have disclosures with which to judge our forecast and valuation. In the interim, it is hard for us to imagine what arguments bullish investors or analysts would use to defend the stock. As such, we remain on the sidelines."


J.P. Morgan analyst George A. Sacco Jr. told clients in a report that he thinks the new issues raised in the

Dow Jones

story will be "very small relative to the overall accounting restatement." He added: "We believe that any wrongdoing was committed by the prior management team and these new accusations do not pertain to the way Fannie managed the risks in its mortgage portfolio." Sacco strangely put an "overweight" rating on the stock, yet set his 12-month price target set at a paltry $45, which was a dollar below the price at which Fannie Mae opened on Wednesday. That also makes you kind of go, "Huh?!"

UBS analyst Eric E. Wasserstrom at least took a pass on judging the merits of the

Dow Jones

story, stating, "At this stage ... we have no confirmed information and therefore have no changes to our view." He maintained his price target at $88.

So there you go. Either the stock is the buy of a lifetime, or it's going to zero. Either some value buyers are going to make their careers buying into this panic, or will have their heads handed to them.

But they sure aren't getting much help either way from analysts who are paid a lot of money to offer direction. And that's probably because, as longtime partners of the rogue mortgage lender, the investment banks are too deeply involved.

From a technical point of view, you should note that the shares broke a massive head-and-shoulders pattern Wednesday, invalidating a potential triple-bottom that had been brewing. Depending on how you do the calculation, the price target now measures out to either $20 or, well, -$7. Sounds like Fannie's kind of math.

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Jon Markman, writer of Value Investor, is the senior investment strategist and portfolio manager at Greenbook Investment Management, a division of Greenbook Financial Services. Separately, he is publisher of StockTactics Advisor, an independent weekly investment research service. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;

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