The Camels Back Is Made of Straw - Fannie Mae and Freddie Mac

KnowledgePlex: Article: The Fall of Fannie Mae; This is not your ordinary accounting fraud. Yes, there's the matter of $ 9 billion in overstated earnings. But the fight over Fannie is a nasty political showdown where everyone has his own agenda. And it's not over yet.
Very good background on the smoking heap of a scandal that these two government-sponsored enterprises have become. The short version is that both entities pretend to be government backed but there charter's are permission to operate inter-state and not guarantees of solvency. This has all the makings of Enron all over again but this time the shockwaves will rock everyones boat.

After the Enron scandal broke, nobody defended Ken Lay or Jeff Skilling. But in the wake of the Fannie Mae scandal, Raines still had legions of supporters. There are plenty of people who still believe that what's good for Fannie is good for home-ownership--and that the whole thing was little more than a political dirty trick. [...]
As for Wall Street, it has its own reasons for defending Fannie, which is still one of the Street's top fee-payers. "The overwhelming majority of FNM's accounting is correct," wrote a Lehman Brothers analyst. "We view this infraction as a speeding ticket, not a capital offense." Bear Stearns analysts concluded that Raines and Howard had been ousted because of OFHEO's "personal animosity toward the CFO and CEO."

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The other view, of course, is that the $ 9 billion represents losses that Fannie should have taken--but didn't--since 2001. And that in avoiding those losses, Fannie's top executives collected millions in bonuses they didn't earn.

The restatement will put Fannie well below its regulatory capital requirements, which is why the company quickly sold $ 5 billion of preferred stock. Nothing says more about the Street's continued belief in Fannie than the ease with which it was able to raise that money. In coming months it will have to raise billions more.