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Fannie Mae Death Watch Part II: Abrupt Conclusion


Ross M. Miller
Miller Risk Advisors
October 11, 2004

I had planned for this week's commentary was to be a humorous look at Fannie Mae's most recent annual report—the one that KPMG, for unspecified reasons, did not sign off on. After viewing this past Wednesday's Congressional testimony on OFHEO's preliminary report that examined accounting irregularities at Fannie Mae, I no longer find any humor in the situation. (The hearings were broadcast on C-SPAN3, digital television's equivalent of the air-traffic control frequencies on a Radio Shack scanner, and webcast from C-SPAN's site.)

My initial glance at Fannie Mae's annual report reminded me of the classic National Lampoon magazine cover that showed a dog with a gun to its head and said "If you don't buy this magazine, we'll shoot this dog." Upon seeing the testimony, it is clear that I had gotten the animal wrong. One Congressman, who gave every appearance of reading his questions from a cheat sheet provided to him by Fannie Mae, straightened me out on this one. It's not a dog; it's a horse. And the horse represents the U.S. economy.

The undercurrent of the hearings was clear: No matter what awful things Fannie Mae might have done, if there is any chance that even a single low-income individual will be unable to buy a home because of sanctions placed on Fannie Mae, it is imperative that we look the other way. Furthermore, the very real possibility exists if we lay so much as a finger on Fannie Mae, it will take down the entire U.S. economy with it.

The scariest thing about the televised hearings is not what appeared on them, but what did not appear—the written testimony of Roger Barnes, a financial accounting manager at Fannie Mae. His testimony, which I never saw discussed at the hearings, alleges that Fannie's management used ham-handed financial manipulations to inflate Fannie Mae's reported earnings (and its managers' bonuses).

Unlike Enron's famous "whistle-blower," Sherron Watkins, Roger Barnes did not get to stay on at Fannie Mae, did not make a heroic appearance before Congress, and is not making a living out on the lecture circuit. Word has it that Mr. Barnes is in hiding. When Sherron Watkins brought her concerns to Kenneth Lay, nothing much happened. Roger Barnes, however, alleges that after he brought his concerns to Franklin Raines, he was harassed, passed over for promotions, and driven from the company. (If I write the word "alleges" enough maybe I'll get to speak at an ABA convention.)

I could go on for weeks, deconstructing Fannie Mae point by point. I could even make the deconstruction entertaining for my readers who go in for that sort of thing. But anything that I might write would be sheer speculation. And it does not have to be that way.

Fannie Mae claims to be all for transparency, so I suggest that they make all of their financial models, including the ones used to value their vast assets and liabilities, available over the Internet. They do not even have to be the current models, the ones they used two years ago should work just fine and should reveal little, if anything, in the way of proprietary information. (As we found out from Long-Term Capital Management, Fannie's brokers already have an excellent idea of their holdings and what they are really worth—what I care about is what Fannie thinks they are worth.)

Hey, they don't even have to make them available to everyone, just to me. Drawing on past experience, if I dropped everything and started dissecting Fannie Mae today, I could give them a clean bill of health in six to nine months. And I'm sure my MBA students would love to help—that way they can get out of predicting Google's stock price will do for the month of November. If Fannie is hiding the "black hole" that some on Wall Street believe it is, the job could take as little as six to nine hours. And, if they don't have financial models, the whole thing could take six to nine minutes.

In the likely event that Fannie (or its board) does not take me up on this offer, I will continue to watch them and take copious notes on the nearest available object. From a safe distance. And away from surveillance cameras. And I'll write happy commentaries that won't offend anyone. Something harmless. Like alien abductions. That's the ticket. So, stay tuned next week for "Alien Abductions and Your Financial Future."

P.S. This commentary represents my opinion. Don't shoot me; I'm only the piano player.

Copyright 2004 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to