We're running out of federally chartered companies to be questioned about their accounting methods. Freddie Mac (NYSE:FRE) went through the wringer last year, costing the CEO and several other top officials their jobs. Freddie's problems cast some deep doubts on Fannie Mae (NYSE:FNM) and its notoriously smooth accounting. Several hedge funds in late 2002 and early 2003 rang the klaxon on Farmer Mac (NYSE:AGM) and its loan loss reserves.
Now, the Securities and Exchange Commission is investigating student loan giant SLM (NYSE:SLM) -- better known as Sallie Mae -- and its accounting. In question are year-end accounting entries that employees made in a newly acquired subsidiary. Sallie Mae quickly responded to the inquiry, stating that it takes such things extremely seriously. According to Sallie Mae, the amounts in question appear to be less than $100,000. We'll certainly see -- if that's the case I can't imagine getting too up in arms about this.
Sallie Mae was a federally sponsored company until 1997, when its shareholders approved severance from the federal government. The company provides education loans to students, including adults, but it now competes with banks and specialty lenders such as Student Loan Corporation (NYSE:STU). Sallie Mae remains the largest holder of student loans in the country.
Is there any way to react to this? Some investors take the approach that an SEC investigation means an automatic "sell." Certainly, such a policy will protect investors from the sting of initially disclosed problems expanding into something larger, a la Enron or WorldCom. On the other hand, at this point in time we're talking about what looks like a procedural issue that does not involve nearly enough money to come close to impacting the overall quality of Sallie Mae's financial statements. Investors would be well-warned to keep an eye on developments here, but I wouldn't run for the exits based on the facts that are publicly known at this point in time.
