By David S. Hilzenrath

The federal government has the power to put Fannie Mae and Freddie Mac into receivership now and should do so without delay to prevent the mortgage funding giants from digging taxpayers into a deeper hole.

That's the assessment of Armando Falcon Jr., who from 1999 to 2005 headed the agency that oversaw the companies' financial stability.

"I would force the more accurate accounting of their assets and liabilities, and that would show them to be insolvent," Falcon said in an interview.

Armando Falcon Jr. File photo by David Scull -- Bloomberg News

"The reason you have to do it now is to reduce the cost of resolving the two companies," Falcon said "We know from the savings and loan crisis that forbearance in dealing with insolvent institutions only increases the cost of resolving the failed institutions," he added.

Regulators allowed many deeply troubled savings and loans to continue taking risks in the 1980s, delaying their collapse and making the eventual bailout more expensive, Falcon said.

Today, as home prices decline and foreclosures mount, one of the big questions facing policymakers is what to do with Fannie Mae and Freddie Mac, which provide crucial funding for mortgage lenders.Together, they own or guarantee $5.3 trillion of mortgages and securities backed by mortgages.

The companies have been losing money and their share prices have plummetted this year. Congress recently authorized the Treasury Department to prop them up with unlimited amounts of government loans or investments -- if the companies consent. Such a bailout could cost taxpayers billions and wipe out current shareholders.

A veteran of Washington battles over Fannie Mae and Freddie Mac, Falcon made his comments before the Web site of The Wall Street Journal reported this afternoon that the Treasury was finalizing a plan to shore up Fannie Mae and Freddie Mac. Details of that plan were not known Friday afternoon.

Falcon, now a Washington-based consultant to banks, investment funds and foreign governments, said he has been telling clients that the government will have to take over Fannie Mae and Freddie Mac and that their stock will become worthless.

While much attention has focused on Treasury Secretary Henry M. Paulson Jr.'s options, Falcon focused on the power Congress recently conferred on a new regulator that replaces his old agency, the Office of Federal Housing Enterprise Oversight. The new regulator, named the Federal Housing Finance Agency and headed by OFHEO director James B. Lockhart III, has the authority to put the companies in receivership if any of several conditions are met. Those include the companies becoming "critically undercapitalized" or becoming "undercapitalized" with no reasonable prospect of rebounding.

Falcon said he would put the companies in receivership on a Friday; wipe out all the shareholders, both common and preferred; remove their boards and management; place their bad assets in a separate entity, and reopen the companies on a Monday under government ownership. Backed by the full faith and credit of the government, they could borrow money at lower interest rates and pass that savings to consumers, Falcon said.

Though the Treasury would need the agreement of the companies to intervene, the agency can act unilaterally, Falcon noted.

Fannie Mae, based in the District, and Freddie Mac, based in McLean, have said they don't need government intervention. In a recent appearance on the Diane Rehm Show, Fannie Mae chief executive Daniel H. Mudd was asked "how in the world" he can make up the lost stock value. "Well, we're going to make that up by continuing to operate the business," he said.

Fannie Mae and Freddie Mac "will never agree to get taken over and will string [Paulson] along until a new administration takes office," Falcon said by e-mail.

Spokesmen for Fannie Mae, Freddie Mac and Lockhart declined to comment for this story.

Falcon, a Democrat, worked on savings and loan issues as a member of the House Banking Committee staff. He faced criticism in 2003 when, shortly after OFHEO gave Freddie Mac a favorable review, the company disclosed major accounting problems. Falcon later initiated a probe of Fannie Mae's accounting, which found that the company flouted rules to inflate profits and bonuses.

Though some Fannie Mae supporters in Congress denounced him for making such accusations, the company ultimately admitted it had overstated profits by $6.3 billion and reached a $400 million settlement with the Securities and Exchange Commission.

In interviews this week, Falcon took issue with the companies' current accounting, saying they have taken only small writeoffs in relation to their billions of dollars of paper losses on mortgage-related investments. The companies have refrained from taking a larger hit on the grounds that they expect the investments to recover their lost value.

"At some point the notion that their assets are only temporarily impaired becomes a fiction and a fraud," Falcon said. "If we're not there, we're approaching it very, very soon."

Peter Wallison of the American Enterprise Institute, a longtime critic of Fannie Mae and Freddie Mac, said he doesn't think it is clear that either of the companies is critically undercapitalized, but he said a regulator's first instinct is to keep an institution alive and functioning. In the world of perceptions, "if a regulator has to declare that one of his charges has failed, that means the regulator has failed," Wallison said.

Freddie Mac recently reported that, if it liquidated its assets and liabilities at their values as of June 30, it would have been left with a negative $5.6 billion. That disclosure could give the regulator additional grounds to put the company in receivership, Falcon said. Under the new law, the regulator can do so if the company's assets are less than its obligations.

Accounting specialists interviewed for this story said there are other ways of comparing assets to obligations that would lead to a different conclusion.

From the folks at SnagFilms, we bring you one filmmaker's remembrance of the tragic events of September 11, 2001.

SnagFilms is a startup backed by Washington Capitals majority owner Ted Leonsis and others; we wrote about the company here.

*As a senior executive at Adams Respiratory Therapeutics, John S. Thievon tackled the challenge of launching a pricey decongestant in a marketplace filled with cheap generics. Ultimately that drug, Mucinex, trampled its competition.

Rudnic (By Kevin Clark -- The Washington Post)

Thievon now faces a similarly daunting task as the chief executive of MiddleBrook Pharmaceuticals, a struggling Germantown biotech that's about to launch its once-daily amoxicillin treatment for strep throat. Yesterday MiddleBrook shareholders voted to accept an outside investment of $100 million from Equity Group Investments, a deal that came with a required change in management. Founder Edward M. Rudnic stepped down as chief executive in favor of Thievon -- an event that took all of 10 minutes, as three of the largest stockholders voted in favor of the arrangement.

*Montgomery County Executive Isiah Leggett (D) said he would require thousands of county employees to take unpaid leave and shut down all but essential government services for two days as part of a package of budget cuts. Leggett said additional furlough days and midyear belt-tightening might be needed as the county confronts a projected shortfall of about $250million for fiscal 2010.

*Michael Landrum is bringing his latest culinary venture to the District, specifically to business-starved Ward 7, which has had only one sit-down restaurant for nearly a decade. Landrum plans to open Ray's the Heat by April in East River Park Shopping Center, a strip mall at Minnesota Avenue and Benning Road NE, said Chris LoPiano, director of development for City Interests, a two-year-old development company with a focus on projects east of the Anacostia River.

From staff and wire reports

*Human Genome Sciences of Rockville said it entered a manufacturing alliance with Hospira, agreeing to manufacture, develop and sell supplies of some of Hospira's biopharmaceutical products. The companies did not disclose financial terms of the deal or identify the products HGS would make. HGS also said it entered into a marketing-services agreement with Eden Biosciences in August. Under that deal, Eden will help HGS identify potential clients for its manufacturing and late-stage process development services.

*Reston-based Comstock Homebuilding said it has reached a deal with Regions Bank to relieve the ailing home builder of about $5.3 million worth of debt in development loans. Regions will foreclose on three of Comstock's properties in Atlanta in exchange for releasing the home builder of its obligations.

*SLM said it named Kenneth Fischbach senior vice president of corporate finance. The Reston company said Fischbach will oversee debt investor relations. He had served as managing director at Residential Capital, a mortgage originator and servicer.

*Martek Biosciences of Columbia said third-quarter profit grew 52 percent, to $9.3 million (28 cents a share) from $6.1 million (19 cents) in the comparable period a year earlier. Revenue grew 13.6 percent, to $88.4 million.

Welcome to Alejandro Lazo's weekly blog-within-a-blog on the region's Latino business community; we're calling it "La Plaza."

By Alejandro Lazo

Raul "Danny" Vargas, chairman of the Republican National Hispanic Assembly and a prominent businessman from Northern Virginia, felt his ears still ringing on day two of his party's St. Paul convention.

Vargas had attended a throbbing concert the night before by Puerto Rican Reggaeton star Daddy Yankee, who, in one unlikely cultural pairing, has endorsed Sen. John McCain for president.

But Vargas was obviously not in the Twin Cities just to get his groove on. The founder and president of Herndon-based marketing and communications consulting firm VARCom Solutions, has been busy getting the word out this year that John McCain is the right man for Hispanics, despite what some analysts have warned might be an unpopular year for Republicans among Hispanic voters after the contentious immigration battles of the last few years.

Danny Vargas, chairman of the Republican National Hispanic Assembly, stands at the podium during a walk through of the Republican National Convention in St. Paul, Minn. Photo by Alex Wong/Getty Images North America.

La Plaza caught up with Vargas on his cellular phone to get his take on the convention and what McCain would mean for Hispanics and business. We talked about immigration first.

"The immigration reform over the last several years has had the name of John McCain on it, George Bush has been the one trying to push it as well," Vargas said. "Our candidate for president is the one, who, during the primaries was the one who had the courage to stand up and say no, we have got to treat our Hispanic brothers and sisters humanely: they are children of God. I think that is worth a lot when it comes down to it. I would put John McCain's credibility within the Hispanic community against anybody."

That law would have put many illegal immigrants on the path to citizenship. McCain has shifted right since then, telling critics he understood his party's opposition and would work to secure the nation's borders first.

The Republican party's platform this year calls for tougher enforcement of laws, including the ongoing crackdown on employers who hire illegal immigrants, punishment for "sanctuary cities" and completion of a fence along the U.S. border with Mexico.

How that message will play out with Hispanic voters remains to be seen, but Vargas said the entrepreneurial message of the Republican party is one that will resonate louder than the immigration issue.

"At the end of the day, Hispanics are entrepreneurial," Vargas said.

The ailing economy, health care, education and the war in Iraq are all top concerns for Hispanic voters this year, Vargas said.

The chairman has been staying at a Holiday Inn near the airport. He has spent his time giving interviews to Latin American journalists, Univision, ABC and, of course, La Plaza. Vargas was slated to speak on the third night of the convention, but was dropped from the programming when the Gulf Coast storm Gustav sent programmers scrambling to rearrange the week's schedule.

One of Vargas's applause lines from that speech was supposed to be this:

"The core values of the Hispanic community are family, faith freedom and opportunity. These are Republican values and the values of John McCain."

From the Associated Press

Telecommunications and network equipment maker Ciena said its fiscal third-quarter profit fell to $11.7 million (12 cents a share) from $28.3 million (29 cents) in the comparable period a year earlier, as a sharp increase in operating expenses overshadowed revenue growth. The Linthicum-based company's revenue rose 23.5 percent to $253.2 million. Analysts were looking for $253.7 million in revenue.

Ciena's operating expenses rose to $110.7 million from $81.6 million, due mostly to a rise in research and development expenses.

Citing order delays from some service provider customers related to the economy, the company said it expects $190 million to $210 million in the quarter. Analysts polled by Thomson Reuters are looking for $263 million in revenue. Ciena's outlook is also lower than the $216.2 million in revenue it reported in the fourth quarter of fiscal 2007. Shares fell on the outlook.

The HealthCentral Network of Arlington said it has purchased HIV/AIDS patient resource TheBody.com and HIV/AIDS health professional resource TheBodyPro.com, adding to its roster of health information Web sites.

The terms of the deal were not disclosed. The two sites were services of New York-based Body Health Resources Corp.

In a statement, HealthCentral said the acquisition would add 700,000 monthly visitors to a network of sites that already draw 11 million monthly.

And it sounds like HealthCentral's acquisition spree might not be over:

"TheBody.com is HealthCentral's second acquisition in less than three months," the company said. "In June, the company acquired consumer health information company MedTrackAlert, LLC, more than doubling the size of its email newsletter reach. With leading investors (Polaris Venture Partners, The Carlyle Group, Sequoia Capital, and Allen & Company, and most recently IAC), The HealthCentral Network continues to acquire and build new capabilities and products that deliver high-quality information to health and wellness audiences, and high-quality relevant opportunities for marketers."

Staff writer Zachary Goldfarb recently wrote about HealthCentral's ambitions here.

*When Blackstreet Capital Management affiliate SFCA in April purchased the assets of Simplicity for Children, a leading manufacturer of children's furniture, it structured the deal so it would not assume responsibility for products already on the market. Yet, last week, the issue of liability arose when the Consumer Product Safety Commission directed stores to pull Simplicity bassinets from their shelves after the deaths of two infants.

Blackstreet, a Bethesda private-equity fund, got involved with Simplicity when the Reading, Pa., company was in trouble. Last year, Simplicity had issued its fourth crib recall since 2005, pulling 1 million units -- the largest crib recall in U.S. history. In addition, a 4-month-old Missouri girl had died in one of its bassinets on Sept. 29, and the company was losing money. SFCA was aware of the recall when it bought Simplicity's assets.

When the CPSC issued the warning about Simplicity bassinets last week, the commission turned to retailers to yank bassinets off store shelves. SFCA had refused to issue a recall, saying it gained the right to sell products under the Simplicity brand but that it did not assume the liability of products already on the market, said Rick Locker, an attorney for SFCA.

Traditionally, only mergers result in one company taking on the liability of another, said Alan O. Sykes, a professor at Stanford Law School. A major benefit of buying assets is that no liabilities are incurred.

*We posted yesterday saying that the chief executive of District-based Adams National Bank stepped down. The resignation of Jeanne Delaney Hubbard, who also left the posts of chairwoman and chief executive of parent company Abigail Adams National Bancorp, comes on on the eve of meeting with federal banking regulators to review the company's financial condition.

Adams National faces mounting losses on real estate loans and this summer disclosed that it had been classified as "troubled" by its regulator, the Office of the Comptroller of the Currency.

The company offered no explanation for Hubbard's departure, but Marshall Reynolds, the largest shareholder, said it was connected to the rising losses. Reynolds said the bank would now focus on correcting its problems, beginning with a board meeting today to discuss possible replacements for Hubbard.

*The latest contract awarded to build part of the intercounty connector will cost $100 million more than the highest price predicted for that seven-mile section, a sign critics say shows that the project is in danger of exceeding its budget. The middle segment of the six-lane toll highway between Georgia Avenue and Route 29 was predicted to cost $410 million to $460 million, according to documents on the project's Web site. The agreement, known as Contract B, was awarded July 22 at $559.7 million, 22 percent above the most recent estimates, Maryland highway officials said.

*JE Robert Cos. made three more hires from General Electric as former GE executive Michael Pralle expands the company's business in the Czech Republic and Eastern Europe. President Pralle, who ran GE's real estate business, is joined at the McLean real estate investment firm by Karim Habra, Christopher Zeuner and Petr Kosar, whose task will be to acquire properties in Central and Eastern Europe, JE Robert said. The three will be based in Prague.

Pralle said he intends to shift the mix of real estate investments to 60 percent foreign, 40 percent American over the next four years, from the current 60 percent U.S. concentration.

*GTSI, which provides computer services to government contractors, said Chief Financial Officer Joe Ragan is leaving the company to take the same post at drilling services firm Boart Longyear. GTSI named Peter Whitfield as interim head of finance. He has been vice president of financial planning, analysis and internal audit.

From staff and wire reports

*Office Depot has partnered with N.E.W. Customer Service, a Dulles firm that sells extended warranty service plans for electronics, to start an online recycling program for unwanted devices. Customers can go to Office Depot's Web site and print a prepaid UPS label to ship N.E.W. their gizmos. In return, they will receive Office Depot gift cards. Office Deport is the second company to sign up for the program. Sam's Club joined in May.

*The Food and Drug Administration accepted for review a new-drug application by United Therapeutics of Silver Spring and its subsidiary Lung Rx for an inhaled treatment for pulmonary arterial hypertension. The application will be subject to a review period of 10 months.

*GeoEye expects sales to increase in the fourth quarter following the launch of the company's GeoEye-1 spacecraft, chief executive Matthew O'Connell said. Launch was pushed back to Sept. 7 from tomorrow.

*Mortgage finance company Freddie Mac sold $4 billion in debt this week at prices that show investors' fears about the company are still elevated, but lower than last month. Freddie's $3 billion in two-year debt was auctioned today at a yield of nearly 3.23 percent, or almost 0.98 of a percentage point above comparable Treasury notes. That gap -- or spread --was larger than the company paid in similar offering in July, which was priced at 0.88 percentage points above comparable Treasury securities.

Jeanne Delaney Hubbard, the chairwoman, president and chief executive of Washington's Abigail Adams National Bancorp, has resigned.

Abigail Adams is a two-bank holding company, majority owned and operated by women. A statement did not give a reason for her departure. The company recently suspended its regular quarterly dividends to help weather the current economic downturn.

Hubbard served as a director since 1995, taking over as CEO in 2005.

No successor has been named. The company said it is "in the process of evaluating potential replacements for President and Chief Executive Officer."

From the Associated Press:

McLean media giant Gannett Co. said Wednesday that it bought a 10 percent interest in CareerBuilder from Tribune Co. for $135 million, giving it a majority stake in the employment Web site.

The deal bumps Gannett's interest in CareerBuilder up to 50.8 percent. Tribune now owns 30.8 percent of the Web site, with McClatchy Co.'s stake at 14.4 percent and Microsoft Corp.'s interest at 4 percent.

Gannett Chairman, President and Chief Executive Craig Dubow said in a statement that he does not anticipate the transaction creating any major changes at CareerBuilder.

The controlling interest gives Gannett, publisher of USA Today, three seats on CareerBuilder's six-seat board of directors. The other seats are held by Tribune, McClatchy and CareerBuilder.

Tribune, which was bought out last year in an $8.2 billion deal, is selling the Chicago Cubs ballpark, baseball team and a 25 percent interest in a local sports channel to raise cash to pay down $13.4 billion in debt, mostly related to the buyout. Real estate mogul Sam Zell, who helped lead the media company's buyout, said in a statement that the Gannett deal helps "monetize some of the value CareerBuilder has built over the years" while allowing it to keep some interest in the company.