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Newsweek | WALL STREET COVERS ITS FANNIE MAE

Newsweek | WALL STREET COVERS ITS FANNIE MAE


October 18, 2004

When Wall Street’s biggest firms settled with regulators in April 2003 over charges of fraudulent stock research, the industry promised a new era of independence. Marc Lackritz, president of the Securities Industry Association, promised Wall Street would ensure that “the quality and integrity of financial analysis is beyond reproach.”

The recent highly critical report by federal regulators on Fannie Mae’s accounting practices, though, may rekindle questions about Wall Street’s ability to issue unbiased research. Fannie is one of Wall Street’s best clients, issuing close to $2 trillion in debt to provide cheap loans for home buyers, and those figures don’t include other huge fees Wall Street earns in helping Fannie. Fannie’s top five underwriters have earned close to $700 million in fees since 1999, according to Thomson Financial. Those same firms have provided continuing upbeat assessments despite growing signs Fannie was facing financial difficulties. Merrill Lynch, Fannie’s largest underwriter, maintained its “buy” rating last week. A Merrill spokesman said the firm’s research is objective, adding: “Our buy rating is in line with the consensus of research on this company.” Other leading underwriters–Goldman Sachs, Lehman Brothers, Morgan Stanley, and JPMorgan–declined to comment.

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NYTIMES | A Coming Nightmare of Homeownership?

NYTIMES | A Coming Nightmare of Homeownership?


By GRETCHEN MORGENSON
Published: October 3, 2004

IT is literally a trillion-dollar question: What will a humbled, reined-in Fannie Mae, the nation’s biggest mortgage provider, mean to the economy, the financial markets, interest rates and housing in America?

Since regulators disclosed evidence of widespread accounting improprieties at the company, which carries almost $1 trillion in mortgages on its books, the response from the financial markets has been surprisingly muted. To be sure, Fannie Mae’s stock has lost 14 percent of its value, but its debt securities have held fairly steady and the pools of mortgages it sells to investors have continued to attract buyers.

Even if Fannie Mae’s troubles are eventually worked out, there may be other, potentially nasty reverberations from the company’s weakened position. These include a possible hit to the dollar if foreign investors, who have bought so much of the company’s debt, become alarmed by the accounting problems and sell.

James A. Bianco of Bianco Research in Chicago, said he thinks foreigners might well cut back on their Fannie Mae debt holdings, as they seem to have done when Freddie Mac, another government-sponsored enterprise in the mortgage business, had its own accounting problems last year. ”If Freddie spooked foreigners, the Fannie scandal will exacerbate the trend,” he said.

In addition, Fannie Mae’s woes could work against the Federal Reserve Board as it moves to keep inflation in check by raising interest rates. If the company, under heightened scrutiny, decides that it must manage its interest rate risk more aggressively, it would have to buy huge amounts of Treasury securities. Doing so would push rates down further, creating a vicious cycle in which more homeowners refinance their mortgages, leaving Fannie Mae with a larger mismatch between the longer-term debt they have issued to buy the mortgages and the shorter-lived mortgages themselves.



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