Three Fannie Mae execs out, shares rally earlier

By Al Yoon

NEW YORK (Reuters) - Fannie Mae (FNM.N), the biggest U.S. mortgage finance company, on Wednesday announced a shake-up of top executives, including the exit of its chief financial officer, in an effort to better implement a plan to preserve capital and cut losses.

Fannie Mae announced management changes amid a storm of controversy over its ability to survive a wave of mortgage defaults that have caused four straight quarters of losses and recent speculation a government bail-out was near. But the board is "firmly committed" to Chief Executive Officer Daniel Mudd, Chairman Stephen Ashley said in a statement .

Stephen Swad, who was CFO since early 2007 and helped Fannie return to timely filing of financial statements following a major accounting scandal, was replaced by Fannie Mae Controller David Hisey, the company said. Peter Niculescu, head of capital markets, will replace Robert Levin as chief business officer. Fannie Mae's chief risk officer, Enrico Dallavecchia, will also leave.

The changes "signal they are trying to correct some problems," said David Dreman, chairman of Jersey City, New Jersey-based Dreman Value Management, LLC, a Fannie Mae and Freddie Mac shareholder. "When you change risk management people, it has to be viewed as recognizing problems, so it is mildly positive."

Fannie Mae's announcement followed the third consecutive day of gains in its shares and those of rival Freddie Mac on Wednesday as investors grew more confident there would not be a government "nationalization" that would wipe out their shareholdings.

Shares of Fannie Mae, which rose 15.3 percent to $6.48 in regular New York Stock Exchange trade, fell 2 percent in extended trade following the announcement. Shares of Freddie Mac climbed 19.65 percent to $4.75 on the NYSE.

Fannie Mae on Wednesday passed another test of investor confidence with a successful sale of $2 billion in short-term debt.

Merrill Lynch & Co. became the latest major Wall Street bank to cast doubt on speculation the Treasury would directly support Fannie Mae and rival Freddie Mac (FRE.N), since both have adequate capital to offset losses for "several quarters."

The Merrill note published Tuesday follows similar comments by Goldman Sachs Group Inc. and Citigroup Inc.

"Odds of Treasury stepping in and dealing with Fannie Mae and Freddie Mac before the end of this year have been considerably diminished," said Charles Lieberman, chief investment officer for Advisors Capital Management, LLC.

Fresh calculations by analysts on revenue and losses suggest the companies, while seen losing more money, can survive on their own, avoiding a government takeover.

Shareholders expect a nationalization to be a worst-case scenario as policy-makers don't want taxpayer money rewarding companies that took risks and pocketed billions of dollars in profit through the housing boom.

A Reuters report on Friday that the Treasury believes the government-sponsored enterprises (GSEs) should remain shareholder-owned may have dispelled fears, analysts said.

A Treasury spokeswoman at midday shot down a financial market rumor of a pending announcement on the GSEs.

Analysts and policy-makers have conceded Fannie Mae and Freddie Mac will likely be forced to increase the amount of capital they hold relative to their investments, making them less profitable. However, their portfolios have surged as their regulator eased a capital surplus requirement earlier this year, sending interest-income soaring.  Continued...