Fannie May Not...

...file its 2004 financial report to the SEC on time. In fact, it definitely won't. Surprise, surprise.

However, there's more to that 4.3 percent price drop than meets the eye. Also in today's news, we read that John Snow and Alan Greenspan will be testifying about Fannie Mae (FNM) before the Senate Banking Committee in just a couple weeks.

This raises an interesting question: Is the market reacting to the bad news about the fundamentals (that bad news being that no one will know for a long time precisely what those fundamentals are), or is it responding to political risk? I raised this question once before, in my pre-blog days, and I like to think that subsequent events have proven me right. In fact, on the very day that TAE column appeared, Fannie's stock price dove once more, driven (arguably) by news that Congress was taking a renewed interest in the housing enterprise.

The most likely explanation for FNM's precipitous decline is a combination of both factors. The fact of the matter is that there are two distinct problems with Fannie. The first is accounting that was probably criminal (I'd bet on indictments before Christmas). But the second, deeper problem is structural. Even if its books were pure as snow, Fannie's and Freddie's unusual and outdated relationship with the government would still expose them, their investors and, ultimately, everyone else to all sorts of risks.

So the real question is: Will Congress be able to see through the scandalous accounting to what lies beneath? Sadly, the indictments are a much stronger bet by far.