In December 2006, Fannie Mae restated its financials for 2001 through June 30, 2004, correcting $6.3 billion in overstatements. It was the first earnings statement filed by Fannie Mae in more than two years. After misstatements came to light in mid-2004, the company was fined $400 million by the SEC, and its senior executives were purged.
Freddie Mac’s own accounting problems were revealed in 2003. The company had misstated earnings by $5 billion, although in contrast to Fannie Mae, Freddie Mac understated its earnings to smooth out volatility in profits.
But the accounting scandals were hardly the only challenges facing Fannie Mae and Freddie Mac. The agencies had already been under fire for years. Some critics, characterizing the government-sponsored enterprises (GSEs) as posing a “systemic risk” to the health of the U.S. economy, would like to see the GSEs’ portfolios capped.
The GSEs’ portfolios are indeed sizable. Fannie Mae’s investment portfolio grew at an average of 12 percent a year from 1990 to 2004, reaching $704 billion at the end of last year. Freddie Mac held $776.9 billion in debt at that time. Together, the two agencies hold roughly $1.4 trillion in debt. One point of frequent criticism, from GSE watchdog groups like FM Policy Focus and the editorial pages of the Wall Street Journal, is the special privileges afforded to the GSEs, which critics argue are the only two Fortune 500 companies not required to disclose their financial difficulties to the public. Other special privileges include exemption from state and local taxes (except for property taxes), and conditional access to a multi-billion-dollar line of credit from the U.S. Treasury Department.
GSE watchdog Bert Ely, a financial institution and monetary policy consultant based in Alexandria, Va., sees reform as the penultimate step toward privatization. “I think the reform issue moves us in that direction, not necessarily in a straight line, but I think that’s ultimately where it goes,” said Ely. “[The agencies] survive only because of the special benefits that Congress has bestowed upon them. Take away those benefits, and they disappear largely.”
At the beginning of last year, the New York Stock Exchange (NYSE) amended its rules to give it more discretion in de-listing organizations delinquent in filing their financial statements. The timing was not coincidental, according to GSE critics, who charge that the rule was put in place specifically so that Fannie Mae wouldn’t be de-listed.