Mortgage giant Fannie Mae announced Tuesday that an unfavorable ruling on how it accounts for derivatives would mean a loss of $9 billion after taxes.
The estimate is based on the derivatives' value as of Sept. 30, the Wall Street Journal reported. Fannie Mae's federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), has accused the company of manipulating its books to make it look as if earnings were less changeable than in reality.
After OFHEO's scathing report, the Securities and Exchange Commission launched a formal investigation into the issue of whether Fannie Mae improperly applied accounting rules known as FAS 133 and FAS 91. A resolution could take months, observers say.
The company did say that one aspect of how it applied FAS 91 was inconsistent with generally accepted accounting principles, or GAAP. Fannie Mae added, however, that making the corrections would net to zero, the Journal reported. OFHEO said that Fannie Mae applied FAS 133 so that it could take losses over many years rather than all at once, which is incorrect.
An analyst at Bear Stearns, which provides investment-banking services to Fannie Mae, said the company could easily handle a $9 billion hit. David S. Hochstim called the figure a "worst-case estimate" and said the company's core capital stood at about $38 billion as of Sept. 30.
But longtime Fannie Mae critic Bert Ely, a financial analyst in Alexandria, VA, said the latest disclosures reinforce his belief that Chief Executive Officer Franklin D. Raines and Chief Financial Officer Timothy Howard will be forced out of their jobs. A Fannie Mae spokesman would not comment.
Fannie Mae also is delaying the release of its third-quarter financial results because its auditor, KPMG LLP, is waiting for the conclusion of various investigations before signing off on the company's financial statements.