Much Ado About...?

Last year, it was Freddie Mac that went through a wringer after regulators found problems with its accounting practices. Now it's Fannie Mae's turn. At the time when Freddie Mac's turmoil erupted, along with a house cleaning that unceremoniously dumped the company's top executives, MSN expressed regret about the way that accounting scandal had been handled.

Specifically, we felt Freddie Mac might have done itself more harm than good by ushering long-time chairman and CEO Leland Brendsel out the door without so much as a thank you. He had, after all, provided stewardship to a company that helped make long-term, fixed-rate financing available for homebuyers while generating substantial returns for shareholders.

We hope that Fannie Mae is able to manage its crisis more smoothly.

First, a couple of points to remember. Fannie Mae, like its secondary market rival, stands accused of trying to manipulate the timing of earnings and losses, not of manufacturing phantom earnings. That's a lot different than the kind of wholesale accounting fraud that occurred at corporate scofflaws such as Enron and WorldCom, where billions of hidden debt and phantom earnings led to bankruptcy.

Secondly, while the Justice Department has opened a criminal investigation, nobody has - at this point - persuasively made the case that senior management at Fannie Mae deliberately or knowingly violated accounting rules. The corporation's business is complex and strong oversight is warranted, but we are not convinced that accounting issues identified by Fannie Mae's regulator rise to the level of criminal wrongdoing or managerial malfeasance. Fannie Mae remains a pillar of the nation's housing finance system, a system that is the envy of the world and has contributed to a record rate of homeownership.

Is greater scrutiny of Fannie Mae's accounting practices warranted? Yes, absolutely. Should management be held to account? Again, clearly yes. But a shakeup at this time could easily do more harm than good. Let's grant Fannie Mae a presumption of innocence before jumping to the conclusion that its regulator is correct in asserting that earnings were manipulated to facilitate bonuses to top management.

Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.mortgageservicingnews.com