Clearing Out Fannie's 'Phantoms'

Score one for the lion tamer. The federal regulator that oversees home-mortgage giant Fannie Mae finally persuaded that government-sponsored enterprise to agree to clean up its questionable accounting practices.

Perhaps emboldened by its earlier success in reining in Fannie's cousin, Freddie Mac, the Office of Federal Housing Enterprise Oversight released a report last week alleging Fannie's accounting practices served to circumvent rules, smooth earnings to appear less volatile, and make executive bonuses even fatter than they already are. (FYI: Fannie CEO Franklin Raines had a total 2003 compensation of some $20 million.)

On Monday, Fannie agreed to make the necessary reforms.

Though OFHEO remains woefully understaffed to carefully scrutinize the workings of a company that's the nation's second-largest financial entity - and, together with its cousin Freddie Mac, holds about half of the $7.8 trillion in US home mortgage debt - OFHEO should be commended for finally tackling Fannie, accusing it of "cookie jar reserves" and "phantom assets."

Congress certainly has been much less reluctant to do so - no doubt thanks to Fannie's and Freddie's campaign largess, and their phenomenal armtwisting public relations machine.

Last year, OFHEO went after Freddie Mac, but that was only after Freddie's own accountant wouldn't go along with some of its accounting practices. Freddie had to pay $125 million in fines, and four of its top executives were fired.

The two housing giants enjoy privileges for low-cost borrowing that are the envy of banks. Wall Street assumes the two quasi-governmental entities, which hold what amounts to only a symbolic line of credit at the US Treasury, that Uncle Sam (read: taxpayers) would bail them out if they were ever to fail.

They're also exempt from paying state and local taxes. Even Fed chair Alan Greenspan thinks they should eventually be privatized.

He's right. As of now, both Fan and Fred are trying to boost their shareholders' bottom line, as well as fulfill a public mission to provide affordable housing. They need to resolve that inherent tension.

If Fannie and Freddie are allowed to grow unchecked, Mr. Greenspan warns, their possible failure could threaten the U.S. financial system. With both administration and Congressional action, step by step, these lions should ultimately be tamed.