“Our business is the American Dream,” claims Fannie Mae. Its accountants were apparently the dreamers. The Securities and Exchange Commission’s rejection of the US mortgage giant’s hedge accounting backs up the scathing report issued by Fannie’s regulator in September.

Fannie estimates it will take a $9bn hit to earnings spread over the last four years. A restatement will also diminish Fannie’s capital, endangering compliance with minimum regulatory requirements. To rebuild capital, the company could be forced to sell mortgages, slowing asset and profit growth, or cut the dividend.

Investors reacted with surprising composure. They nudged Fannie’s shares down only 2 per cent on Thursday, shaving just over $1bn off the company’s market capitalisation. True, they may have anticipated the SEC’s verdict. But the SEC’s statement raises broader questions. It offers no support for claims that Fannie was the victim of an ambiguous accounting standard. Instead, it says the company came up with a “unique methodology” that “did not qualify” for hedge accounting. That begs closer inspection of all Fannie’s financial disclosures, including other facets of its trillion-dollar derivatives portfolio.

If that fails to worry investors, there is also the prospect of tighter regulation, now increasingly likely. Any new restrictions on the range of Fannie’s business, the size of the company’s balance sheet or its profitability would stunt future returns. Perhaps shareholders think it’s all just a bad dream.

Get alerts on Lex when a new story is published

Copyright The Financial Times Limited 2018. All rights reserved.

Comments have not been enabled for this article.

Follow the topics in this article