My Net Worth

Enron in many ways was the poster child for corporate failures in the early part of this decade. Shareholders lost billions; thousands lost their jobs and their stock options, and some even lost their retirement (unwisely putting much of their funds into Enron's stock).

To add to the intrigue, the Houston-based Chairman and CEO of Enron was a staunch supporter (fundraiser) for President Bush's election run.

Have there been any accounting scandals recently, at least to large, well-known companies, involving persons with loose political ties?

Well, yes there has. Who? Fannie Mae (and Freddie Mac). The initial guestimates of the accounting 'irregularities'? $9 billion. Because of these accounting problems, Fannie recently changed it's auditing firm to Deloitte & Touche. Included in Deloitte's engagement is to reexamine prior year (audited) financial statements.

Why is this significant? Because Fannie Mae poses significant systemic risk to the US economy. A Federal Reserve economist describes the relationship between Fannie Mae (and other Government Sponsored Enterprises) and the US Government as ambiguous.

The housing-related government-sponsored enterprises Fannie Mae and Freddie Mac (the "GSEs") have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief.

The general perception is that if Fannie (or Freddie) gets into trouble, they will be bailed out by the US Treasury. This perception is dangerous. Investors and creditors in Fannie Mae believe there is no default risk (risk of loss). When investors construct their portfolios using this assumption, prudent investment strategies (primarily diversification) are ignored. This leads to greater risk for those investing in Fannie.

Areas where Fannie may pose systemic risk are in it's derivative portfolio (coincidentally the source of much of the $9 billion error) and in the debt issued by Fannie held by investors, banks, and credit unions.

Derivatives are nothing new. Accounting for them is. Significant estimates and judgement are required to faithfully present them in the financial statements. Significant changes in value can impact the net worth of the company, favorably or unfavorably. In addition to the valuation and presentation of derivatives, there is also a risk that the counterparty to the transaction will be unable to pay/settle the contract. Holes can open up on the balance sheet when the counterparty cannot pay a receivable due from the failed counterpary.

Fannie also issues significant amounts of debt/bonds. Investors like these instruments because they are perceived as nearly riskless yet offer a higher yield than government securities (the safest investments of them all).

If Fannie does default, a hole opens up in the balance sheets of all the holders of Fannie's debt. That hole could wipe out significant portions of retained earnings/net worth, causing the institution to become insolvent.

As for politically connected, Fannie hires numerous former government officials. Notable (former) Fannie employees were:

• Franklin Raines (former Clinton Administration Budget Director)
• Jamie Gorelik (former Clinton Administration Department of Justice appointee)
  

I cherry picked these (there are others/more) but for those that want to hang Enron around Bush, has anyone bothered to hang Fannie's problem on Clinton, as spurious and reaching as it may be to do?

So, we have a company that poses significant systemic risk to the US economy, has (so far) a $9 billion accounting problem, has switched audit firms, the CEO and CFO have resigned, and former Clinton/government officials were in key leadership positions at the company.

This scandal, on the surface, is just as serious as Enron, and arguably worse, given the systemic risk Fannie poses to the US economy.

Does anyone care?