FANNIE MAE

By

SALLY RAMAGE

SUMMER 2004

INTRODUCTION

Fanny Mae is a publicly held company , the biggest corporation in the United States' $7 TRILLION mortgage investment market and hold one quarter of this secondary mortgage market for US home loans .It is the second -largest issuer of debt in the US after the federal government. which guarantees Fannie Mae to a total of $2 trillion.

RECENTLY DISCOVERED IRREGULARITIES

The corporation is alleged to have held back expenses at year end in order to keep profits steady as per forecasted figures and so achieve bonus compensation targets. It has manipulated its earnings per share ratio[1] since 1998. This was so that it could maintain stable earnings at the expense of accurate financial disclosure. It employed an improper reserve in accounting for the amortisation of deferred price adjustments under GAAP Accounting Rules and tolerated related internal control deficiencies. As far back as 1966, studies by Brief [2] demonstrated that cheating on the earnings ratio was a bad influence on resource allocation, prices and output, the business cycle and economic growth in general.

This false accounting manipulated those investors who simply trusted and market by taking the earnings ratio as the main decision factor of sound investment, investing in Fannie Mae.

PAST MORTGAGE COLLAPSES - THE SAVING AND BANKS DISASTER

It must be remembered that there was a mortgage market scandal in the US .; the Savings and Loans debacle[3] which caused billions of dollars of bank losses in 1989 Savings and Loans were small time money lending co-operatives which grew in poor communities and gathered deposits from people in the neighbourhood by paying interest on savings and lending the money to other neighbours who wanted to borrow money to buy homes. With government permission, this grew , but with rising inflation and fraud, deposits were spent and loans were taken out to pay loans until the system crashed and depositors lost their money when US federal debt rose to $2000 billion .

THE PRESENT MORTGAGE ISSUE

Now only 15 years later , it is happening again in the mortgage market. From a deficit of 542 billion US dollars in 2003, the US had a retained mortgage portfolio of $1000 billion plus debts to EU and Asian banks of $800 billion and a sharp increase of hedge funds to US $ 40 billion. The US also has $ 210 billion in credit card loans[4]. With US business mostly equity based , compared to the equity and fixed income business base of Europe, there is not much competition between banks.(See Table 1 for net capital flows)

Table 1-UNITED STATES CAPITAL FLOWS 2001 to 2003

Direct Investment Billion $	Year 2001	2002	2003
Inward	152	40	82
Outward	minus 120	minus138	minus155
Net	32	minus98	minus73
Portfolio Investment Private Sector:
Inward	399	388	379
Outward	minus 85	minus 16	minus64
Net	315	404	314
Foreign Official sector's assets in US	50	95	208
Net Foreign Liabilities of US Banks	minus17	minus70	minus70
All Other Flows	81	58	60
Total Flows, net	416	528	579
Net capital Transfers	minus22	minus 47	minus37
Current A/C balance(deficit)	minus394	minus481	minus542

Source: Bureau of Economic Analysis, (2004),US.

Fanny Mae's present financial fraud is not an exception to the rule in the mortgage market in the US. The Federal Bureau of Investigation(FBI) reports in 2004 state that the whole US mortgage market is fraudulent.[5] The FBI have investigated hundreds of mortgage frauds[6] recently covering billions of US dollars which are defrauded , causing billions of dollars of losses to financial institutions. Such mortgage fraud is occurring in Charlotte, Washington, New York, Georgia, Missouri, California, Nevada and many other states and is therefore widespread.[7]

FANNIE MAE'S FRAUD AND FINANCIAL IRREGULARITIES

(1) It put the US Federal Government at risk.

The first impact is the potential loss to the US federal government which guarantees Fannie Mae up to $2 trillion ,whilst Fannie Mae itself guarantees the payments of $1.9 trillion of mortgage-backed securities.[8]The US government already owes other debt totalling 7.1 trillion dollars to Japan, China, Saudi Arabia, including 80 billion dollars to France, Germany and Russia. Regulatory investigations and litigation, a steady amount yearly as per the SEC yearly enforcement actions (Table 3), is costly. For instance, World-com's fraud litigation cost the taxpayer almost US $3,000 million to the year 2002, Enron's about 60 million US dollars, conflict of interest and other cases over US $1025 million.[9]

(2)..It put the Global Financial Markets at risk.

This could impact on the US dollar which could be devalued and since 66% of US assets are owned by foreign domiciles, devaluation might follow if such owners cease to invest in the US assets and this will cause an erosion of the US market. But , peculiarly, although the US financial situation is aberrant compared with Europe including the UK, its stock market performance is very similar to that of the UK and Europe [10] (see Table 2 below) This may be because the US has one trillion dollars invested in the UK and European banks whilst 50% of the UK's assets are invested in the US, smoothing out the market performances.

Table 2

COMPARISON OF STOCK MARKET RETURNS US,UK,FRANCE and GERMANY

'85	'87	'89	'91	'93	'03	'
31.7%	5.2%	31.%	30.%	10.%	12.%	US
53%	35.1%	21.%	16%	24.%	12.%	UK
83.2%	-13.4%	36.%	18.%	21.%	12.%	FR
136.5%	-34.3%	47.%	8.8%	36.%	8.5%	Gmbh

Source: Stock Markets Historic Data

(3) Unqualified Accounting Statements of the Auditor misled the market.

In clear violation of Accounting Standards, the auditors of Fannie Mae, issued an unqualified audit certificate[11]. The 2002 Sarbanes Oxley Act made drastic changes to corporate governance The Chief Executive Officer must certify that each periodic financial report. fully complies with the requirements of sections 13(a) and 15(a) of the Exchange Act and that the information in the report is fair and true in all material respects, of the financial conditions and results of the company. There are now criminal sanctions for signing a false report.. Violation of section 302 carries civil penalties to the Chief Executive Officer and violations to section 906, certifying accounts knowing it to be false, subjects him to a fine of up to one million US dollars or imprisonment for up to ten years , or both. [12] If the CEO or CFO wilfully makes such a certification, the penalties increase to a maximum fine of US $ 5 million and twenty years imprisonment. And in addition to the penalties for false certifications, , the Act establishes new criminal offences, including destruction , alteration or falsification of records in connection with federal investigations and bankruptcies proceedings, conspiracy, or attempt to commit securities fraud; and retaliation against whistleblowers It also increases criminal penalties for securities, mail and wire fraud, the violations of the Exchange Act and the Employee Retirement Income Security Act. There are new sentencing guidelines for corporate crime, effective as of November 2003. The Sentencing Guidelines apply a chart that uses two variables - the crime's offence level and the offender's criminal history., to determine the length of prison sentence. In a complex accounting fraud which causes millions of dollars in losses to banks and others, a chief financial officer can face thirty (30)years in prison . An examination of levels of federal securities fraud class action litigation from 1992 to October 2004 show that the average number of securities fraud lawsuits for this period was 222.cases This indicates the seriousness with which the SEC views fraud and with the 30-year prison sentence available, should be a sober check on illegal intentions.

(4) Insufficient Regulation for a multi-trillion dollar organisation tarnishes the reputation of the US financial market.

It is surprising that a business with mortgaged assets valued at three trillion dollars was regulated by a minor body, the Office of Federal Housing Enterprise Oversight (OFHEO) and supervised by the Secretary of Housing and Urban Development and not directly by the Securities Exchange Commission.

Because Fannie Mae's Regulator is the OFHEO which is not a financial regulator but a housing regulator, the fraud continued for years. This has similarities with other large frauds such as the Enron fraud. Enron had very little regulation and lobbied government for even less regulation at a time when the SEC was proposing stricter controls on corporate 'conflict of interest'

(5) Illegal, unlicensed , securitisation of debts .

Just as Enron quietly expanded its illegal internet futures trading under its energy regulator instead of under strict futures trading financial regulators .(because of its futures trading over the internet, it should have had the same level of regulation as the Chicago Board of Trade or the New York Mercantile Exchange.) Fannie Mae quietly stayed with the Housing Supervisor and grew into a massive trillion dollar bank-like business using the legal loophole that it was not a bank but a 'thrift'

Table 3 Enforcement actions of the SEC : 1999 to 2003

	1999	2000	2001	2002	2003
self-regulatory organisations	1	0	0	0	0
broker-dealers	131	123	112	76	92
investment advisors	56	54	54	48	55
investment companies	19	18	8	14	14
transfer agents	15	11	12	7	9
insurance companies	1	0	0	0	0
FEDERAL SECURITIESCLASS ACTION FRAUD LITIGATION	203	215	493	268	216

Table compiled by author: Sources: Securities Exchange Commission - Annual Reports 1999,2000,2001,2002,2003.; Stanford Law School Clearinghouse Data; American Bar Association - Committee on Criminal Litigation.

(6) Gross Capital Inadequacies

Gross Capital inadequacies have been hidden by a complex use of Special Purpose Entities to hedge certain Fannie Mae investments. Basically Fannie Mae had no assets to speak of that could possibly represent its debts. To speak colloquially, Fannie Mae took loans out to buy property and took more loans out to pay those loan payments and took further loans out to make those payments, etc. Their fancy name are hedge betting, derivatives, securitization, options, etc. This is also the method used by Enron. No one would have found out about Enron's fraud if stock had continued to rise, and they would have continued to tell lies in the accounts for ever. The trick here is that Enron sold assets at a profit to non-consolidated Special Purpose Entities and recognised these profits in its financial statements.. It sold itself to itself for a profit and put the profit on the Balance Sheet, making it look even wealthier when in fact it was bankrupt many times over. Similarly, .Fannie Mae guarantees its own loans . If house prices in the US start falling, Fannie Mae will suffer great losses on top of the drop in asset value due to inflating its past 5 years earnings per share. But the global economists know that Fannie has government guarantee . The situation has caused a spread of banking panics in many countries as people wonder if the federal government will bail Fannie Mae out. The federal government has decided that it will not be allowed to collapse.

ADDRESSING THE LEGAL ISSUES - CLOSING THE GAPS?

Market Response

The Federal Reserve 's response to Fannie Mae's false accounting and fraud was to refuse to promise to buy back open purchases of dated paper such as 10-year T Notes and the European Central Bank took all Fanny Mae debt from its reserve base. Fannie Mae's own Regulator, the Office of Federal Housing Enterprise Oversight has demanded that Fannie Mae must , from now maintain 30% more capital than current rules stipulate. The OFHEO also demanded changes to the contracts of the CEO and the MD so that they would only be able to draw on their stock options and salary before September 2004, as per SEC rules. Asia has encouraged trade by offering rate swap contracts and low rates to corporate borrowers. Fannie Mae's stock price has decreased from $128 before this news to $70.10 on 6^th November 2004 [13]when Fanny Mae redeemed $350 million securities and the dollar fell.

HOW 'THRIFT' INSTITUTIONS ESCAPES BANKING REGULATION BUT BECAME SECURITIZED GROUPS

The financial services corporation, Fannie Mae, is unregulated and is heavily involved in unregulated cross-border securitisation to the sum of trillions of US dollars. It is not classed as a state bank and "it has been getting away with murder". A state bank is defined in the United States Charter 1813 as organised and operated under state law. A savings association, like Fannie Mae, savings and loans association or thrift institution is not a state bank.

Such Thrift institutions are only regulated by the US Treasury's Office of Thrift Supervision for consumer credit issues, a lenient and softer supervisor than the US banking supervisor. These 'thrifts' escaped through this loophole and over the years have steadily engaged in the financial services market, tax and estate planning, securities, custodial matters, trust transactions artificially allocated, low quality or high risk assets, money laundering, black economy, drugs trafficking, generating capital through stock purchase loans overseas, terrorism, organised crime, subjective underwriting criteria.

In the mid 1980's the US discovered it had massive fraud in these savings and loans institutions which resulted in hundreds of billions of dollars of losses. Until this time , the 'thrift' industry consisted of mutual entities, like the UK's mutual building societies. Thousands of these entities were put into receivership and thus put up for sale and new owners, foreign and US, were given incentives to buy the bankrupt thrifts, with the state promising the new owners non-supervision, carrying forward of losses acquired for tax relief, concessions to be unregulated and to engage in any lawful activity.

Later, these so-called 'thrift' companies were acquired by other financial non-bank organisations which made use of the regulatory slack to operate insurance companies, securities, savings accounts, loans, credit cards and mortgage loans, . until the US Gramm - Leach- Bliley Act 1999 which stopped commercial companies from holding 'thrifts'. This law was not retrospective and so such 'thrifts' formed before 1999, were allowed to continue in business. This is how Fannie Mae came to use bond futures, derivatives, hedging and corporate swaps.

STATE LEGISLATION TO PREVENT PREDATORY MORTGAGE LENDING

And when Fannie Mae's illegal securitisation came to light in 2003, it triggered a US consumer lending alert by the federal government., quickly followed by changes in legislation in various states.

There is the amendment to the New Jersey Home Ownership Security Act 2002 in November 2003 A new section 279 amended the Act to eliminate 'covered loans' and to prohibit 'loan flipping', a fraud. The section also excluded escrows to pay for future taxes and insurance.[14]

The state of Massachusetts also enacted legislation as a direct result of Fannie Mae fraud , namely , the Massachusetts Predatory Home Loan Practices Act 2003, to be applied to all loans closed on or after 7 November , 2004. The Act includes a prepayment penalty incurred in the refinancing of a loan and the Act stops the previous unfair terms of misleading advertising, unreasonable terms, fees and charges on all home mortgage loans. It also makes 'loan flipping' illegal and prohibits the financing of credit insurance., with compulsory mandatory reporting of payment history. The Act permits a court to rescind or bar a lender from collecting on, a home mortgage loan contract that violates the law. The Act prohibits the following terms and practices - no lending without home counselling; no lending without regard to repayment ability; limit on financing points and fees; limit on payment to contractors; no recommending default on existing debt; no evading the Act; no prepayment penalties; no increased default interest rate; no balloon payments; no call provision; no negative amortisation; no modification of deferral fees; no advance payments; no mandatory arbitration clauses. New York also has similar new legislation.

The state of Maine now has new mortgage legislation Maine Truth in Lending Act 2004 with anti-predatory lending provisions. The state of Nebraska also reacted to the Fannie Mae fraud and made amendments to its Nebraska Mortgage Bankers Registration and Licensing Act. In January 2004, Oklahoma has in force a new anti -predatory lending law, the Oklahoma Anti-Predatory Lending Law. and New Jersey also made amendments to its New Jersey Home Ownership Security Act.

NEW SEC REGULATION FOR FANNIE MAE

The SEC also, has now advised such non-publicly held subsidiaries of bank holdings, that in spite of being independent, they should, but not must, comply with section 301 and have an audit committee. Also, the SEC is now in discussions to bring new disclosure requirements for ASSET-BACKED SECURITIES (ASB'S) for the asset-backed market.

NEW LAW RELATING TO OVERSEAS FINANCIAL BANKING BUSINESS

Now the connection with the EU Basel Capital Accord, EU Market Abuse Directive, EU Prospectus Directive,[15] money laundering and new US federal

Regulation is absent for Thrift Cross-Border activities which include all manner of financial activities transferred to foreign countries. This poses high risk for such countries ' markets, even though foreign banks' jurisdiction are governed by the International Money Laundering Abatement and Financial Anti-Terrorism Act 2001. Already , some of the US savings and loans holding companies have European operations and are already protected under the Gramm-Leach-Bliley Act 1999, because they were formed before 1999 and the Act is not retrospective.

These 'thrifts' engage in offering clearing-house services through a foreign agency office, including global custody, settlement, securities lending , paying agent and CEDEL depository services; investing in foreign currency-dominated certificates of deposit and foreign debt instruments and providing foreign currency exchange forward contracts to commercial borrowers; foreign currency exchange services; making loans on the security of foreign real estate; re-insurance activities, provide internal asset-management services to reduce tax, and establishing foreign real estate investment trusts!

These thrifts are currently not subject to federal financial services regulation other than the 'thrift' regulator. The US with the Basel Committee, have developed specific rules for these 'thrifts' in the EU, such as the Joint Agency Statement on Parallel Banking Organisations ('thrifts') and the Office of Thrift Supervision (OTS) now has a role as a consolidated financial services regulator under European Union Directive 2002/87. [16] The United States now has joint legislation with the European Union, partly governing the EU banking sector.[17]. . The Bank of England Financial Stability Report 2004 reveals that the US accounts for the largest single country exposure of UK -owned banks. It is planned that the US will impose a similar weighted capital requirements from European owned banking institutions which are operating in the US.

US 'thrifts' have, over many years, let into the global financial system trillions of dollars of unregulated financial products, most of which can be summarised as 'junk bonds'. The EU and the US now wish to call an amnesty on and start afresh with new regulations to be applied only to new products. This is the crux of the European Union's Basel II Accord and the United States's Depository Institution Management Interlock Act 2000 (DIMIA). Cross-border financial interaction with some form of security via capital requirements for all banks and non-bank institutions is now in place.

COMPROMISES MADE TO THE USE OF INTERNATIONAL ACCOUNTING STANDARDS.

The EU has agreed to allow the US banks (and all other parties)to use their present accounting standards but restate the accounts to statements EQUIVALENT to the International Accounting Statements.

No definition of the word "equivalent" has been given.. It was the use of GAAP Accounting standards which Fannie Mae used to manipulate its operating costs, profit and earnings per share for at least five years.

THE US ACCOUNTING STANDARDS BOARD

The Powers Report which was commissioned. soon after the Enron collapse, reported that Price Water-house Accountants had breached SEC requirements in giving a true and fait opinion on the exchange of Enron shares for the Special Purpose Entity's "put note"; had failed to treat the Special Purpose Entities as Enron assets and had treated a third-party debt as equity; had made insufficient and opaque disclosures to the SEC; had condoned the use of derivatives for hedging risk; had condoned disproportionate employee bonuses which had not gone through the proper procedure of Board approval and had left untangled the complicated incomprehensible financial transactions or securitisation and most alarmingly, had failed to see anything wrong in Enron's two year period of internet futures trading in volumes equivalent to the trading of a small Stock Exchange, without SEC approval or licence.

The SEC is considering whether to compel companies to make their earnings ratio public, filing their earnings information to include a side-by-side reconciliation of the announced earnings to GAAP Accounting Rules, along with a plain- English narrative description of any differences. to earnings calculation using International Accounting Standards. [18]

SECURITIZATION DEBT AS USED BY FANNIE MAE

Securitisation debt has a lower interest-rate cost( see Table 4 below) than say, corporate debt Securitized capital market debt is called "Commercial Paper"". The Table below shows the short term attractiveness of securitisation compared to Ordinary bank rate; the small reductions in bank rates make for very substantial cash-flow differences when the securitisation involves billions of US dollars and is one method of providing liquidity for companies not in a position to borrow, so preventing bankruptcy, although a company should be prudent enough not to take the high risks.that securitisation entail.[19]

Table 4 -Securitized and ordinary commercial bank rates

Year	2000	2001	2002	2003
Commercial Paper-I month	6.2%	3.8%	1.7%	1.0%
Commercial Paper -2mths	6.3%	3.7%	1.8%	1.6%
Commercial Paper - 3 mths	6.3%	3.6%	1.7%	1.7%
Prime Bank Rate	9.2%	6.9%	4.7%	4.0%

Source: Bloomberg.com .

The US securitisation industry deals in trillions of dollars of securitisation each year, a very lucrative industry. The US Federal government has implemented the Sarbanes -Oxley Act 2002 demands transparency in the financial reports and could literally wipe out the securitisation industry, causing several states to enact laws that permit 'true sale' treatment without regard to the substance of the transaction. [20]

When US banks show signs of deep financial trouble, they can be bankrupted, a practice alien to Europe The Federal Deposit Insurance Corporation (FIDC) is authorised to conserve the debtors' bank balance. But the FIDC' s power does not extend to assets which are no longer owned by the bank, i.e. securitized debt

US CORPORATE GOVERNANCE CHANGES THAT DID NOT PROTECT AGAINST FRAUD

It is a telling fact that in the history of US corporate governance, rewards by way of shares was not usual,; the usual method of calculating management reward was the use of accounting ratios as indicators of performance and earnings per share was the chosen ratio, this same earnings ratio which was manipulated by Fannie Mae.

After the OECD Corporate Governance Rules were published in 1998, corporate governance Codes of Conduct [21]were operated and share incentive schemes for employees and for the Management Board became popular and institutional investors grew. US corporate executives[22] enjoy higher salaries and bonus share options than executives in other countries, There is shareholder primacy [23] as there is in Europe although it is institutional shareholders who have increased share ownership from 30 to 50% from 1980 to 1996 at the expense of individual share ownership which has decreased from 70% in 1970 to 48% in 1994.[24] These institutional shareholders are by definition financially astute and should have challenged Fannie Mae's management where there was an accounting issue.[25]

THE SECURITIES EXCHANGE COMMISSION - FEDERAL REGULATOR.

There was much conflict of interest in the Enron financial fraud and there is at Fannie Mae, conflict of interest because the directors of the Board have been involved in approving all of the securitisation deals, which are so complex, that it is questionable whether they understood securitisation. [26]More importantly, the 2002 Sarbanes-Oxley Act was the reaction the recent serious financial frauds and it mandated some corporate governance changes for listed companies. CEO and CFO's must return to the company any profits if they sell their their shares within 1 year of the Financial Reports. There is more insider trading regulation and better accounts transparency because now, off-Balance Sheet transactions and Special Purpose Entities must be reported. The audit committee has more power, responsibility and independence to monitor the Board with criminal sanction for misreporting. Outside accountants and lawyers are required to calculate the asset register The SEC also set out for NYSE and NASDAQ, similar corporate governance rules to the Cadbury Code used by LSE listed companies[27]. The voluntary code recommends at least 3 non-executive directors and one non-executive Chairperson for each company Board. But the SEC was not the regulator for Fannie Mae, so these rules did not apply.

CONCLUSION

Fannie Mae highlights the vast multi-trillion dollar unregulated US financial market which has also permeated across borders . It has been play-acting as the paragon of good corporate management , whilst in fact it led the US insurance market in inflating prices, conflict of interest, bid rigging, a complacent regulator, and insufficient capital /liquidity plan. manipulation of its earnings ratio to lend an air of liquidity and soundness, and poor audit and internal controls. Fannie Mae engaged in high risk synthetic securitisation, the use of credit risk mitigation techniques, that is, collateral, guarantees and credit derivatives, for hedging the underlying exposure without collateral.

The result of this alarmingly massive financial fraud is that many states of the US speedily enacted new legislation against anti-predatory money lending. Recently Germany amended its Mortgage Bank Act to protect the Pfandbrief holder's rights in case of an issuer's insolvency ; since Germany has 70% of the European covered bond market and some of the market share of US Treasury and Agency Paper which the Asian Central Banks no longer wanted .

In deceit ,Fannie Mae misused structured finance vehicles, designed to lower financing costs and spread investment risk, to carry out sham transactions and mislead investors, analysts and regulators about their true financial condition.

(November 2004).

STATUTES AND CONVENTIONS

Anti-Predatory Lending Act 2004 (Oklahoma)

Asset-backed Securities Facilitation Act 2002 (Delaware)

Basel Capital Accord (European Union)

Depository Institution Management Interlock Act 2000 (US)

Graham-Leach-Bliley Act 1999 (US)

Home Ownership Security Act 2003 (New Jersey)

International Money Laundering Abatement and Financial Anti-Terrorism Act 2001 (US)

Market Abuse Directive (EU )

Mortgage Bank Act 2004 (Germany)

Mortgage Bankers Registration and Licensing Act 2004 (Nebraska)

OECD Corporate Governance Convention 1998.

Predatory Home Loan Practices Act 2003 (Massachusetts)

Prospectus Directive (EU)

Sarbanes-Oxley Act 2002 (US)

Truth in Lending Act 2004 (Maine)

BIBLIOGRAPHY

Alexander. D , (2000) , 'Financial Reporting', London: Chapman & Hall.

Bank of England, (2004), 'The Financial Stability Conjecture and Outlook Report', p.28, June 2004.

Basel Committee on Banking Supervision, (2004), 'International Convergence of Capital Management and Capital Standards: A Revised Framework', p 1-7, 11-15, June 2004.

Bloomberg.com, (2004), Market Data.

Croke. J. J and Manbeck. P .C , (2004), 'Revisions to Proposed Capital Adequacy Framework', The Banking Law Journal, New York: A. S. Pratt & sons.

Dahya. J and Travlos. N, (2002), 'The Cadbury Committee, Corporate Performance and Top Management Turnover', Vol 57, p 461-483, Journal of Finance.

Davies. P and Behrens.J, (2004), 'Commercial bankers see the bright side of Basel II', American Banker, 28 April 2004.

Economist, (2004), 'Basel Lite', 3 July 2004.

Economist, (2004), 'Now for the hard part', 15 May 2004.

Economist, (2003), 'Safety First: How to handle bank regulation', 3 May 2003.

Fleishman. S, (2004), 'Mortgage fraud concerns FBI', Washington Post, 18 September 2004.

Freiden. T, (2004), 'FBI warns of mortgage fraud 'epidemic': Seeks to head off "next Savings and Loans crisis'"', Washington: CNN Law Centre.

Gompers. P and Metrick. A, (2001), 'Institutional investors and equity prices', Quarterly Journal of Economics.

Hall. B and Leibman. J, (1998), 'Are C.E.O 's really paid like bureaucrats?', 112, No.3, p 653-691, Quarterly Journal of Economics.

Hall. B and Murphy. K, (2002), 'Stock Options for un-diversified executives', 3, 42, Journal of Accounting and Economics.

Institutional Investor, '(2003), 'Basel Under Threat', July 2003.

Iwata.E, (2004), 'Celebrated CEO faces crisis', USA Today, 6^th October 2004.

Kaplan. S.N and Bengt. H, (2004), 'Report on the state of US Corporate Governance 2004', AEI-Brookings, University of Chicago: Joint Centre for Regulatory Studies, Publication 04-02, pi.

O' Shea. J , (1991) , 'The Daisy Chain - the sensational and true story of the greatest banking scam ever - the Savings and Loans scandal' , London: Simon & Schuster.

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Paletta. D, *2004), 'Basel II Nears Endgame: Outlining the next moves', American Banker, 28 April 2004.

Perry. T and Zenner. M, (2000), 'CEO compensation in the 1990's':Shareholder alignment or shareholder expropriation?', Wake Forest Law Review.

PR Newswire, (2004), 'Mutual Fund Industry urges Accounting and Auditing Reform', 9 July 2004.

Quote.com, (2004), 'Fannie Mae Redemption', 2 November 2004.

Revell. S, Jones. T, Kalderon. M, (2004), 'The Prospectus Directive and its implementation in the UK', Seminar, London: Freshfields Bruckhaus Deringer, October 2004.

Robinson. J. K and Lashway. S. T, (2003), 'The Sarbanes-Oxley Act of 2002: A brief summary of the new Professional Responsibility Obligations for Security Attorneys; New Criminal Provisions and Reforms to the Sentencing Guidelines', American Bar Association Section in Litigation, Spring 2003.

Santo. J. A.C, (2000), 'Bank Capital Regulation on Contemporary Banking Theory: A Review of the Literature', p 1-24,Bank for International Settlements, September 2000.

Schwarcz. S, (2004), 'Securitization post-Enron', Vol 25.No.5, Yeshiva: Carduzo Law Review.

Securities Exchange Commission, (2003), Annual Report.

Securities Exchange Commission, (2002), Annual Report.

Securities Exchange Report, (2001), Annual Report.

Securities Exchange Commission, (1999), Annual Report.

Simmons. L and Ryan. E. M, (2003), 'Post-Reform Act Securities Lawsuits', Cornerstone Research, New York: Cornerstone.

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Willie. J. (2004), 'Japan, then Argentina, no muddle', Hat Trick Newsletter

Date: 3^rd November 2004.

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[1] Earnings per share is found by dividing profit attributable to the ordinary shareholders by the number of ordinary shares in issue and the price/earnings ratio, the more important ratio, is calculated by dividing the share price by the earnings per share. This relates the company performance to external perception. Generally a high price/earnings ratiois a good indicator of market support . For companies quoted in the financial press as Fannie Mae often is, it is essential that the price/earnings ratio is consistent and comparable and any area that determines profit will have an effect on this ratio. That is why Fannie Mae decided to treat certain operative expenses in certain ways - to keep the p/e ratio "smooth". Alexander. D, (2000), 'Financial Reporting', London: Chapman & Hall.

The accounting technique of 'earnings smoothing' is common to many serious financial frauds. It was used at Microsoft systems Inc, Waste Management Inc, Enron Inc. It involves inflation of earnings per share, the key being that debt was under-reported and operating costs were also under-reported.

[2] Brief. R, (1966), 'The origin and evolution of nineteenth century asset accounting'. Butterworths.

[3] O'Shea.J, (1991), 'The DAISY CHAIN - the sensational and true story of the greatest banking scam ever - the Savings and Loans scandal', London: Simon & Schuster.

[4] Bank of England, (2004), 'The Financial Stability Conjecture and Outlook Report', p.28.

[5] Fleishman. S, (2004), 'Mortgage fraud concerns FBI', Washington Post, 18 September 2004.

[6] US examples of mortgage fraud are (1) buying a house with a large mortgage at a greatly increased price from a partner, selling it back to him quickly for its real market price and leaving a large mortgage unpaid; (2) fictitious credit histories in order to obtain large mortgage; (3) forged loan documents; (4) mortgage foreclosure methods used to buy property in order to conceal the true buyer's name.

[7] Frieden. T, (2004), 'FBI warns of mortgage fraud 'epidemic'. Seeks to head off 'next S & L crisis', Washington :CNN Law Centre. By 2004 all these states which suffered mortgage fraud had enacted new and amended legislation to stop anti-predatory lending home loan practices.

[8] Mortgage-backed securities offer investors the chance to enhance their overall yield their fixed-income portfolios with securities that are government guaranteed like Fannie Mae's or that carry an AAA rating.

[9] Source : Bank of England, (2004), ;Financial Stability Review', June 2004., p 56.

[10] Kaplan. S. N and Bengt. H , (2004) , 'Report on the State of U.S. Corporate Governance 2004 ', AEI -Brookings , University of Chicago::Joint Centre for Regulatory Studies, Publication 04-02, p1. The report states that currency movements affects market returns and attempts to attribute the US 's similar performance to corporate governance which it claims is better than other nation's corporate governance. Other factors are publicly avaliable information about executive pay, and country productivity.

[11] Financial Statements that are unqualified are normally relied on as showing a true and fair view of the financial position, performance and changes in financial position of an enterprise.

[12] Robinson . J. K. , Lashway,.S.T, (2003), ' The Sarbanes=Oxley Act of 2002: A brief Summary of the New Professional Responsibility Obligations for Security Obligations for Securities Attorneys, New Criminal Provisions, and Reforms to the Sentencing Guidelines', American Bar Association Section in Litigation, Spring 2003.

[13] Quote.com, (2004), 'Fannie Mae Redemption', 2 November 2004, Washington:: Quote.com.

[14] Thacher Proffitt & Wood LLP, (2004), 'Consumer Lending Alert', June 2004.

[15] Revell. S, Jones. T, Kalderon. M, (2004), 'The Prospectus Directive and its implementation in the UK', London: Freshfields Bruckhaus Deringer, October 2004.

[16] Croke. J .J and Manbeck. P. C, (2004), 'Revisions to Proposed Basel Capital Adequacy Framework', The Banking Law Journal, New York: A. S.P ratt & Sons.

[17] There is at present $1 trillion in the EU banking sector.

[18] PR NewsWire, (2004), ;Mutual Fund Industry urges Accounting and Auditing Reform', 9 July 2004.

[19] Schwarcz. S, (2004), 'Securitisation post-Enron', Vol 25.No.5, Yeshiva :Cardozo Law Review

[20] Delaware was the only US state to brazenly enact the Delaware Asset-Backed Securities Facilitation Act 2002, give Delaware the right to determine what constitutes a true sale in a securitisation transaction. The Act states that ''any financial assets purported , in the transaction documents, to be transferred in a securitisation transaction "shall be deemed to no longer be the property, assets or rights of the transferor."

[21] These included -

a) A nominating committee and not the CEO must select the Board members;

b) Annual CEO reviews;

c) non-executive directors

[22] Hall. B and Leibman. J, (1998), 'Are CEO's really paid like bureaucrats?', Quarterly Journal of Economics, 112, No.3, p 653-691. In their study, they found that average pay tripled from 1980 to 1994. In a later study by Hall and Murphy, ( Hall.B and Murphy.K, (2002), 'Stock options for undiversified executives', Journal of Accounting and Economics, 3,42.), said that the trend continueduntil 2001.

[23] Perry. T and Zenner.M, 'CEO compensationin the 19990's:Shareholder alignment or shareholder expropriation?', Wake Forest Law Review.

[24] Gompers.P and Metrick. A, (2001), 'Institutional investors and equity prices', Quarterly Journal of Economics. The study interestingly reveals that executive shareholders only own 2% of shares of a company. This dismisses arguments about executive power and indicates a fair reward .

[25] The SEC rules, revised in 1992, give shareholders the power to communicate

with management teams when and how they wish , provided that the SEC is informed also.

[26] There has been a sharp increase in credit exposure from hedge funds , the leveraged loan market and spreads this recent quarter. Of the whole world total of leveraged loans, the US is and has always been the biggest issuer, nearly 280 billion dollars of three hundred billion dollars this year. High yield bond issuance was also very active and the interest rate market was very volatile.

[27] The Cadbury Code, used by London listed companies apparently results in increased turnover of CEO's due to the presence of non-executive directors on the Board, rather than from separate CEO and Chairperson., (another Cadbury Code recommendation).. This was the result of the study - Dahya.J and Travlos. N, (2002), 'The Cadbury Committee, Corporate Performance, and Top Management Turnover', Journal of Finance, Vol 57, p 461-483.