Hedge Accounting Issues Dog Fannie Mae.(Federal National Mortgage Association)

Think hedge accounting is easy? Just take a look at who did it wrong.

Secondary market giant Fannie Mae - it of the billions in annual earnings, heavyweight political clout and gigantic size - apparently didn't have the expertise to implement FAS 133, the accounting rule for hedging and derivative instruments, correctly. Or else, as its regulator alleges, Fannie Mae deliberately bent accounting rules to smooth out earnings volatility. Some say the regulators don't know what they are talking about. Others say Fannie Mae could be in big trouble for manipulating earnings.

It will take time - and millions of dollars from Fannie Mae's coffers, if not the heads of its top executives - for the secondary market agency and policymakers to sort out the accounting controversy at one of the world's most influential financial corporations. In the meantime, the mess at Fannie Mae is a reminder to mortgage servicers that accounting snafus might mushroom into major scandals.

Remember, nobody can afford to hire more accounting experts than Fannie Mae. And few corporations have more at stake in protecting their reputation than Fannie. If Fannie can fail to pass muster on hedge accounting, it isn't easy. And everyone who uses hedge accounting had better double check to make sure they aren't vulnerable to the sort of charges being leveled against the secondary market agency.

Hedge accounting is not the only issue that the Office of Federal Housing Enterprise Oversight criticized in its blistering report on Fannie Mae's accounting. In fact, most of the publicity about the report centered on allegations that Fannie manipulated the timing of loss recognition under another accounting rule - moving a $200 million loss recognition to a later period - to achieve executive bonus targets.

But a good chunk of the OFHEO report deals with FAS 133, an accounting rule of key concern for mortgage servicers that hedge their interest rate risk using derivative securities. And the accusations against Fannie perhaps serve as ...