WASHINGTON - Armando Falcon Jr., the director of the Office of Federal Housing Enterprise Oversight, dismissed arguments Tuesday that complex standards are to blame for accounting problems at Fannie Mae.
He reiterated OFHEO's accusations that the company willfully violated generally accepted practices.
Mr. Falcon's comments came a day after Fannie disclosed it could face $9 billion of losses if it is forced to restate its financials along the lines outlined by OFHEO in its blistering Sept. 22 report on the government-sponsored enterprise's accounting practices.
The agency has said that Fannie purposely did not account for its derivatives appropriately under Financial Accounting Standard 133, which is widely regarded as one of the most complex accounting standards. Troubles with the standard forced Freddie Mac to restate $5 billion of earnings last year and the Home Loan Bank of Chicago to announce Monday that it was reviewing its own financial statements.
Critics say the standard is open to different interpretations, but Mr. Falcon said that did not apply in Fannie's case.
"I don't think this is about the complexity of FAS 133," he said at a Women in Housing and Finance luncheon. "We believe Fannie Mae did understand the rules and didn't follow them. … I'm not going to enter into a debate about the accounting rule. The fact is that is the rule. Whether we like it or not, we all have to follow it."'
Meanwhile, observers were still trying to assess the impact of Fannie's announcement Monday evening. In addition to saying for the first time how big its restatement would have to be, the company also said it could not file its 10-Q for the third quarter because its independent auditor, KPMG, did not sign the statement as required by Securities and Exchange Commission rules.
Many observers focused on the capital implications of a $9 billion loss. The exact capital figures are hard to calculate since Fannie has not said it will necessarily take the loss, and it is uncertain when it would be recorded if it did.
Using the latest available data from the end of the second quarter, however, a $9 billion after-tax loss would drop Fannie well below adequate capitalization levels. As of June 30, Fannie's minimum capital was $31.188 billion, and it had extra capital of $4.927 billion. The loss would leave it $4 billion below the minimum.
That would be only the beginning. As a result of Fannie's agreement with OFHEO on Sept. 27, the GSE is required to hold 30% of extra capital by next year. Using June 30 numbers, Fannie would have had to hold $40.5 billion of capital - meaning it would have been $13 billion below its requirement - if a $9 billion loss was recognized then and the extra capital requirement had been in effect.
Most observers and analysts said they expect Fannie to have time to deal with any capital deficit.
"I don't think they will have to do a lot of selling off," said Bert Ely, an independent consultant in Alexandria, Va., and an advocate of GSE privatization. "I think they will have to shrink their balance sheet" by slowing down mortgage purchases.
Fannie defended itself in the SEC filing, saying it "continues to believe that its current accounting policies and applications of FAS 91 and FAS 133 are consistent" with generally accepted accounting principles. It said it had presented a written case to the SEC's staff and met with the agency's Office of the Chief Accountant on Nov. 5, accompanied by its auditor.
Whether Fannie must restate past earnings is in the hands of the SEC, which has said it could take months to resolve the matter.
Fannie Mae did release unaudited third-quarter earnings that showed a further slowing of its profit growth. Core business earnings, a measure Fannie says it provides to strip out fluctuations in the values of derivatives, rose 1% from a year earlier, to $1.845 billion. Core profits increased 2%, to $1.86 a share, missing analysts' average estimate by 3 cents, according to Thomson First Call.
