Rumors swirled throughout Wall Street yesterday that troubled mortgage giant Fannie Mae has narrowed its search for a new chief executive officer down to three candidates: a former New York Federal Reserve president, William McDonough, a former Republican senator from Texas, Phil Gramm, and the former chief executive who helped steer then scandal plagued asset-backed lender Conseco Incorporated out of bankruptcy, William Shea.

Bloomberg first reported news of the discussions yesterday, citing “people familiar with the plans.”

Representatives of all three men either declined to comment or did not return a call. A Fannie spokesman, Brian Faith, did not return a call for comment.

Fannie has been conducting a high profile search for a chief executive since Franklin Raines was forced to resign in December after the Securities and Exchange Commission found the Washington-based company violated crucial rules regarding the accounting treatment of hedges on its portfolio of mortgage loans and bonds. For example, the company accounted for losses incurred as a result of interest-rate volatility over a number of years, as opposed to booking the loss when realized, leading to what the SEC termed was an inflated earnings. The eventual restatement of income may wind up to be as high as $11 billion. The company named vice chairman and chief operating officer Daniel Mudd interim chief executive after Mr. Raines left.

Analysts and portfolio managers were unimpressed with Fannie’s reported choices.

“Senator Gramm is a non-starter right-away – stocking the place with political insiders is what got them into trouble in the first place,” said Ely & Company president Bert Ely, a former Fannie consultant who for nearly a decade has been a vocal critic of the company’s financial management. Mr. Gramm, since retiring from the senate in 2002, has been serving as vice-chairman of UBS’s North American securities unit, where he advises the firm’s corporate finance clients In reality, said a person familiar with his role at the firm, he is “A marketing guy for UBS clients who have legislation-sensitive businesses. They talk to him and they feel more in the loop about what is going to happen in DC.”

What Fannie needs, Mr. Ely said, is an executive who can direct a troubled company and stop the middle-to-senior level manager exodus that he said is intensifying with the continuing drop of the company’s stock price.

The stock closed down 1.68% at $53.96 yesterday, slightly above its 52-week low of $53.85. In early January, the stock was trading at $72. The price drop has shaved almost $15 billion of market capitalization from the stock.

As for Mr. McDonough, perhaps best known for his role in directing a ground-breaking $3.6 billion Wall Street dealer-led buyout of the Long Term Capital Management hedge fund in October, 1998, Mr. Ely said that his current role as head of the congressionally chartered Public Company Accounting Oversight Board, where he oversees the implementation of accounting rules, might pose conflict-of interest issues. “If he is working at evaluating the accounting performance of dozens of companies, probably including Fannie, you can guess that he can’t just walk in the door.”

One of the few Wall Street managers to have made money on Fannie stock over the past six months is Sonic Capital’s principal Mark Haefele, who sold the stock short last year. Of the choices, Mr. Haefele said the most credible was Mr. Shea of Conseco, who had experience working with both creditors and investors in reducing Conseco’s $7 billion in financial liabilities. Moreover, he said, he was “probably pretty good at shrinking a portfolio, which is what he will do if he goes to Fannie.” Mr. Shea restored the company to profitability last year and left in August. He now sits on the board of Boston Private Financial Holdings Inc., a fund manager for wealthy investors, according to Bloomberg.

Mr. Haefele argued that the need to add a well-regarded CEO was perhaps the least of Fannie’s problems. “What they need is for every few months for there to be another revelation of an accounting problem.” The stock will stay under pressure until investors can see that like Freddie Mac, which was caught three years ago hiding profits and was forced to restructure, he said, there has been a completed analysis.

Fannie has been contracting its portfolio without Mr. Shea, having reported a drop in its retained portfolio of mortgage loans and bonds down to $875.2 billion from $890.8 billion last month.