Fannie Mae: What's The Damage?

Essay by shawnsmetsA+, July 2006

download word file, 2 pages 2.3

PROBLEM: After reviewing the facts of the article, it appears that Fannie Mae has an accounting problem, which may be due to inappropriate management decisions and lax internal controls of these decisions and practices.

ALTERNATIVE #1: The first alternative in solving management's poor financial decisions at Fannie Mae, is to have the board of directors demand that top management executives at Fannie Mae step down from their duties, or the Federal regulators should terminate their ties with the company.

ADVANATGE: This alternative could help correct and improve the current financial scrutiny the company is currently under. Since it is believed that certain top level executives allowed or developed inappropriate accounting practices for either personal gains or to over-exaggerate earnings growth, these people should be no longer be involved in the direct decisions of the company. This may set a precedent within the company that these types of actions will not be tolerated moving forward.

Also, investors may feel "relieved" knowing that the individuals involved are no longer with the company, boosting investor confidence.

DISADVANTAGE: This alternative may not necessarily solve the problem because it doesn't necessarily solve the poor past accounting decisions. It may also be hard to terminate all that had their hands in this problem and then there is the responsibility of hiring a new management team.

ALTERNATIVE #2: The second alternative to the accounting problem is for the Fannie Mae management team to agree to recalculate, restate and adjust earnings that were reported in the last three years.

ADVANTAGE: Restating and adjusting the past three years earnings may decrease the current financial speculation the company faces today. Also, Fannie Mae may not have to add capital if the changes net out close to zero.

DISADVANTAGE: If they restate and adjust the past three years earnings and...