On a conference call with investors Wednesday, Fannie Mae's chief executive tried to put a positive spin on a few of the challenges stemming from its regulatory woes and market conditions.
The government-sponsored enterprise's recent heavy sales of mortgage assets to help build a required capital surplus were actually beneficial to shareholders, considering the richness of bond prices, Daniel Mudd said.
And the capital markets' current appetite for private-label bonds backed by exotic mortgage products, which Fannie has been cautious about investing in, does not change its long-term growth expectations, he said. Among other things, when "the market turns," Fannie will have opportunities to gobble up this paper on the cheap.
Still, Mr. Mudd bluntly acknowledged the question that was on many minds since the night before, when the GSE said its restatement of more than three years of earnings and its 2004 annual report would not come out until the second half of next year. It was, he said, a question he himself had asked: "Why the hell does this take so long?"
Indeed, the new timeline, though unsurprising to some, apparently was the main factor behind the 4% decline in Fannie's shares Wednesday. Some investor fears were related to the GSE's revelation that without a special dispensation it could well be delisted by the New York Stock Exchange next March.
In a nutshell, the answer provided by Mr. Mudd and other executives on the call about the length of the road ahead was that Fannie was doing the best it can. Many of the numerous steps needed must be done sequentially, rather than simultaneously, and it is throwing as much resources at the effort as possible, they said.
"You don't get more benefit by having two people turn the same screwdriver, or for that matter, two people look at or interpret the same journal entry," Mr. Mudd said.
Fannie expects that more than 30% of its employees will spend over half of their time on the accounting and controls tasks this year, and that it will bring on about 1,500 consultants to help by yearend. In the Tuesday night securities filing, the GSE said it would spend $420 million on the effort this year.
In general, analysts said that besides the details on the restatement's costs and length, little else in Fannie's update was new.
"I would have thought maybe the first half of '06 would have been achievable," said Kenneth Posner of Morgan Stanley. However, even with the delays, "there was nothing in the call that made me think I needed to change my price targets," he said.
Nearly all analysts and observers, even critics, were deeply skeptical about the possibility of a delisting by the NYSE.
Bert Ely, the frequent GSE critic, said lobbying by Fannie and on its behalf would make it difficult for the NYSE to delist the company, even if that meant letting Fannie get away with something others would not.
For this reason, "it's way too soon to react too strongly to the threat," he said.
Then again, most analysts had also said they firmly believed the Securities and Exchange Commission would not agree with Fannie's regulator about its accounting flaws, despite the wealth of evidence in a report last September. That prediction was wrong, and there were considerable ramifications.
In the Tuesday filing, Fannie said the NYSE could keep the listing or drop it if no annual report is filed by Dec. 16. On the other hand, any delay past March 16 could require the NYSE to delist its stock under the exchange's rules, the GSE said.
Freddie Mac, which is emerging from its own accounting troubles, has had similar gaping delays in its reporting over the past two years.
