Fannie Mae is a consistently profitable corporation. While it receives no direct government funding or backing, it has certain looser restrictions placed on its activities than normal financial institutions. For example, it is allowed to sell mortgage backed securities with half the capital backing them up than is required by other financial institutions. Critics, including Alan Greenspan, say that this is only allowed because investors seem to think that there is a hidden, or implied, guarantee to the bonds that Fannie Mae sells ([2]). Although the company describes them as having no guarantee, nevertheless the vast majority of investors believe that the Government would prevent them from defaulting on their debt, and so buy bonds at very low interest rates as compared to others having like risk.
I dont like to pick on Fannie Mae, but it probably this very notion of Fannie Mae being 'consistently profitable' that the company managers were reluctant to give up. And that probably explains (but does not excuse) why Fannie Mae, which experienced major losses as mortgage rates dropped, avoided recording the losses as such. Instead, they were hidden in the balance sheet under AOCI, or "accumulated other comprehensive income" and slowly amortized.
Wikipedia goes on to report the latest events (and I quote) :
In May 2006, the Office of Federal Housing Enterprise Oversight released a detailed report on the scandal, alleging Fannie Mae management fraudulently altered the company's accounting to overstate earnings to boost their personal bonuses. The report also alleges the company hired lobbyists to attempt to get Congress to investigate OFHEO and cut its budget, to hide the misdeeds. Fannie Mae agreed to pay $400 million in penalties. The company's market capitalization droped by $9 billion as a result of the scandal. As of May 2006, no criminal charges have been filed, but the investigation is ongoing.
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