Fannie Mae redoes profits

U.S. regulators plan suit

mortgage giant cutting $6.3 billion off 2001-2004 results


Fannie Mae, the largest buyer of American mortgages, said yesterday that it would reduce its earnings by $6.3 billion to correct several years of accounting problems in one of the nation's biggest financial scandals.

Federal regulators said they planned to file a lawsuit before the end of the year in an effort to recover millions of dollars from Fannie Mae's former top two executives, whose bonuses were tied to the manipulated earnings. Franklin D. Raines, the former chairman and chief executive, and J. Timothy Howard, who had been chief financial officer, were ousted from the company in December 2004, and investigators have laid much of the blame on their shoulders.

"We will file charges within the next couple of weeks," James B. Lockhart III, director of the Office of Housing and Enterprise Oversight, said in a brief interview yesterday. "Unfortunately, the legal process is very cumbersome."

A lawyer for Raines declined to comment, and a lawyer representing Howard did not return phone calls yesterday. A Fannie Mae spokesman also declined to comment.

The two moves are significant steps in the effort to clean up Fannie Mae - formally, the Federal National Mortgage Association - a company whose influence once reverberated through the corridors of Washington and Wall Street. Over the past two years, though, the company has been mired in the scandal.

Federal investigators have searched through the company's records, leading the Securities and Exchange Commission and the Office of Housing and Enterprise Oversight, or OFHEO, to exact a $400 million civil penalty in May. Members of Congress have jousted over the need for a more powerful regulator and to limit the size of its mortgage portfolio, although a bill might not be passed until at least early in the new year.

"We continue to move ahead," Daniel H. Mudd, who replaced Raines as Fannie's chief executive, said in a statement.

In a filing with the SEC late yesterday, Fannie said that errors related to the way it accounted for complex derivatives resulted in a $7.9 billion loss after taxes - or about $2.9 billion less than what the company had previously estimated.

But the company said it misstated earnings by $6.3 billion when it worked through the financial statements from 2001 through the first two quarters of 2004, the last time it filed official results. Fannie Mae is still updating its financial statements from after then - a process that Wall Street analysts and its regulator anticipate could take at least a year more.

The restatement is among the biggest for an American company, although it falls short of the $11 billion correction taken by WorldCom when it wiped out its phony profits.

Lockhart said that Fannie was "making great progress." Still, he noted that there was a long way to go. "They are putting a lot of hard work on getting the numbers out, but they show significant errors and do not even agree with their estimates."

But analysts said the numbers were less important than the message they sent.

"It gives investors some confidence they are getting their act together from a financial perspective," said Robert Napoli, an analyst with Piper Jaffray.

OFHEO might be facing a more difficult task than Fannie Mae as it prepares to try to recoup the many millions of dollars Raines and Howard received as a result of the improper accounting. Regulators have said that of the $90 million paid to Raines from 1998 to 2003, at least $52 million was tied to bonus targets that were reached by manipulating accounting.

Last month, Fannie Mae said it would pay Raines $2.6 million in "deferred compensation" and other amounts to partly resolve a dispute that it violated his employment contract when he was ousted.

It is likely that Raines and Howard will vigorously contest attempts to make them repay money, especially since Fannie Mae is footing their legal bills.

The restatement was announced after the market closed yesterday. Earlier, shares of Fannie Mae rose 57 cents, or nearly 1 percent, to $58.50. The stock once traded above $77 before the scandal was disclosed in the fall of 2004.

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