Fannie Mae case.
Federal regulators noted a growing string of high profile scandals at major U.S. corporations in recent years. The number of fraud cases investigated by the Securities and Exchange Commission jumped 41 percent in the last three years (112 cases in 2001 compare to 79 cases investigated in 1998), resulting in tens of millions of dollars in fines to settle the charges.
I have decided to take a closer look at Fannie May. This company operates in the residential mortgage finance industry. It facilitates the flow of mortgage capital to increase the availability of homeownership for low, moderate, and middle-income Americans. Its lender customers are part of the primary mortgage market, where mortgages are originated and funds are loaned to borrowers.
Fannie Mae's accounting came under scrutiny because last year regulators found it had violated accounting rules on the treatment of derivatives used to hedge interest-rate risks. Fannie is struggling to shore up capital depleted by losses on derivatives. Fannie was $4.5 billion short of the capital it needed by Sept. 30 in 2005 to meet its minimum requirement.
Fannie Mae also received a notice from the Securities and Exchange Commission, which opened an informal inquiry into the company's accounting practices. SEC also has ordered a restatement of the company's results for the past several years. And now the Office of Federal Housing Enterprise Oversight (OFHEO) and the Department of Justice are both investigating Fannie Mae's accounting irregularities. The latter is conducting a criminal investigation.
Among others OFHEO charges that Fannie Mae used so-called "cookie jar" reserve of funds by improperly deferring $200 million in company expenses in 1998. By recording those expenses at a late ...