How Fannie Mae cracked the top 5

May 05, 2011

In the latest sign of a happy, healthy economy, a company that everyone agrees should be put out of business climbed to No. 5 this year on the Fortune 500 list.

The company is Fannie Mae (fnma), the government-controlled mortgage investor whose collapse three years ago was a major milestone along the road to national financial ruin.

Much has been made of how Fannie and its little brother Freddie Mac (fmcc) have become the lenders of first and last resort in the troubled U.S. mortgage market. More than nine in 10 loans made nowadays are either financed or guaranteed by the companies or federal cousins such as Ginnie Mae, in an arrangement that everyone from Tim Geithner on down deems unsustainable.

But that isn’t how Fannie ended up rising to 5 on the Fortune 500, behind only Wal-Mart (wmt), Exxon (xom), Conoco (cop) and Chevron (cvx), and up from 81st last year.

The driver of Fannie’s big move up the charts (and Freddie's too, to No. 20) is an accounting change that aims to keep big financial companies from hiding risks by keeping them off the balance sheet. Combine this with Fortune’s longstanding policy of calculating its list using gross revenues -- rather than the net revenues that Wall Street tracks -- and you have two too-big-to-fail outfits looking  bigger, if not better, than ever.

In Fannie's case, the two accounting rules – ASC 860, which aims to make companies list the assets they control and the liabilities they incur, and ASC 810, which calls for financial companies to put off-balance sheet entities back on balance sheet – had the effect of sending  gross revenue soaring to $154 billion from $29 billion a year earlier.

That number more than quintupled because Fannie got to recognize the income from all the mortgages that it previously held off balance sheet. The rise vaulted Fannie past giant, reasonably healthy industrial companies such as Ford (f) and Hewlett-Packard (hpq) -- even as Fannie lost $14 billion and the tab on its federal bailout ran to $91 billion.

But the income gains the company recognized from the mortgages were illusory -- offset by interest expense, notably the cost of administering the trusts, which make regular payments to investors.

As a result, the company’s net revenue -- the number investors tend to track, to the extent they bother looking at this sorry outfit anymore -- actually fell 22% from a year ago, to $17.5 billion.

This back and forth gives you some idea why the financial reports Fannie publishes with the Securities and Exchange Commission don’t even mention the gross revenue number. Using gross revenue with no accounting change, Fannie would have ranked a lowly No. 94 this year.*

But given the pathetic state of our national finances and Fannie's not insubstantial role in the same, maybe it's about time we gave this all-but bankrupt institution its due.

*Earlier I mistakenly wrote it would have ranked 94th using net revenue. In fact, it would have ranked 161st.

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