OFHEO Questions Fannie's Capital, Earnings

The Office of Federal Housing Enterprise Oversight late Wednesday issued its long-anticipated report on Fannie Mae's accounting practices, questioning the mortgage giant's capital adequacy, its past earnings, and the "quality" of its senior management team.The 200-page report, based on a seven-month investigation, suggests that the congressionally chartered Fannie -- the linchpin of the U.S. mortgage market -- will have to restate earnings of the past several years. Among the many allegations in the report are charges that the company created "hedge designations" retroactively, a violation of federal accounting rules. OFHEO also singles out the company's chief financial officer, Timothy Howard, for failing "to provide adequate oversight to key control and reporting functions" at the company. (Mr. Howard has been a major seller of Fannie Mae stock recently, according to company records.) Meanwhile, the Securities and Exchange Commission has launched an informal inquiry into Fannie's accounting practices, and Sandler O'Neill, which has been a long-time bull on Fannie, early Thursday downgraded the stock from Buy to Hold, saying, "On the surface, it does not look good." Fannie's stock was pummeled on Wednesday and was already trading down about $2 a share when the market opened on Thursday.

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