Fannie's Financial Cookie Jar

When the world's largest buyer of home mortgages - Fannie Mae - cooks the books on reporting its earnings, it runs the risk of sending shockwaves into financial markets.

That's why the Securities and Exchange Commission needed to charge the mortgage giant with violating accounting rules last week. The government-sponsored enterprise had been dipping into reserves in order to help smooth out earnings and create money for executive bonuses. The SEC ordered Fannie to restate earnings from the past four years.

The SEC action could erase 38 percent of Fannie's so-called profits over that period, and leave it with less capital than it is required to hold in reserve. It also puts pressure on some top Fannie executives to be held to account. Indeed, Franklin Raines, Fannie's CEO, who had a total compensation package in 2003 of $20 million, told a congressional hearing in October that he would take responsibility if the SEC found improper accounting practices at the company. Let's see if he means it.

Fannie Mae and her cousin, Freddie Mac, together have a combined debt of some $1.7 trillion. If these enterprises were to fail, taxpayers could be left holding the proverbial bag. (Freddie had his own accounting troubles in 2003.)

Both mortgage giants are in need of much greater oversight by regulators.