Fannie Mae 2004 Annual Report Download - page 72

and soundness. A detailed discussion of our risk management strategies, processes and measures is included in
“Risk Management” below.
We devoted significant resources in 2005 and 2006 to addressing weaknesses identified in our risk governance
structure and to ensuring that we have the personnel, processes and controls in place to allow us to achieve
our risk management objectives. In 2005, we adopted an enhanced corporate risk governance framework,
including the creation of a corporate risk oversight function led by a Chief Risk Officer who reports directly
to our Chief Executive Officer and independently to the Risk Policy and Capital Committee of the Board of
Directors.
Our businesses have responsibility for managing the day-to-day risks inherent in our business activities. Risk
management at the business level is conducted in accordance with enterprise-wide corporate risk policies
approved by our Board of Directors.
Our Single-Family and HCD businesses have responsibility for managing the credit risk inherent in the
mortgage loans and Fannie Mae MBS that we either hold in our portfolio or guarantee. We take a disciplined
approach in managing credit risk. We believe our mortgage credit book of business has strong credit
characteristics, as measured by loan-to-value ratios, credit scores and other loan characteristics that reflect the
effectiveness of our credit risk management strategy. Our credit losses for the period 2002 to 2004 have
remained at what we consider to be low levels, averaging approximately 0.01% of our mortgage credit book of
business. A detailed discussion of our credit risk management strategies and results can be found in “Risk
Management—Credit Risk Management.”
Our Capital Markets group is responsible for managing the interest rate risk inherent in the mortgage loans
and mortgage-related securities that we purchase and the debt we issue. The objective of our interest rate risk
management strategy is to maintain a conservative, disciplined approach to managing interest rate risk. A
detailed discussion of our interest rate risk management strategy and results can be found in “Risk
Management—Interest Rate Risk Management and Other Market Risks” below. Our Capital Markets group is
also responsible for managing the credit risk of the non-Fannie Mae mortgage-related securities in our
portfolio.
Our Restatement
In December 2004, we announced that we would restate our previously filed consolidated financial statements
because those financial statements were prepared applying accounting practices that did not comply with
GAAP. Since the time of our announcement, we have devoted substantial resources towards the completion of
our restatement. We have worked closely with and benefited from the guidance of OFHEO, our safety and
soundness regulator, throughout this process. We have also obtained assistance from a variety of resources,
including PricewaterhouseCoopers LLP, technology consulting firms and outside counsel.
The restatement process included a comprehensive review of our accounting policies and practices, implement-
ing revised accounting policies, obtaining and/or validating market values for various financial instruments at
multiple points in time, and enhancing or developing new systems to track, value and account for our
transactions. The restatement was a complex undertaking that required the dedicated efforts of thousands of
financial and accounting professionals, including external consultants. As described below under “Consolidated
Results of Operations—Other Non-interest Expense—Administrative Expenses,” our administrative expenses in
2005 and 2006 were substantially affected by costs associated with our restatement and related matters, which
we estimate totaled $1.3 billion. We anticipate that the costs associated with preparation of our post-2004
financial statements and periodic SEC reports will continue to have a substantial impact on administrative
expenses until we are current in filing our periodic financial reports with the SEC. As part of our settlements
with OFHEO and the SEC, we paid a $400 million civil penalty, which has been recorded as an expense in
our 2004 consolidated financial statements.
In this Annual Report on Form 10-K, we have restated our previously filed audited consolidated financial
statements for the years ended December 31, 2003 and 2002, and our unaudited consolidated financial
statements for the quarters ended March 31, 2004 and June 30, 2004. The restatement adjustments resulted in
a cumulative net decrease in retained earnings of $6.3 billion as of June 30, 2004 and a cumulative net
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