- The Washington Times - Monday, June 16, 2003

The accounting troubles and leadership shake-up at mortgage giant Freddie Mac break the mold of the corporate scandals that have arisen in the past year or so.

The company, like its sister corporation Fannie Mae, holds special status bestowed by the government as an important supplier of money in the home-mortgage market, which is so pivotal to the economy.

Critics have said for years that the two used their status to build financial houses of cards and to avoid full public disclosure about what they were up to. The critics, as diverse as Ralph Nader on the left and Rep. Richard H. Baker, Louisiana Republican, on the right, had an “I told you so” moment last week when Freddie Mac announced the firing of its president amid an accounting review and the abrupt resignations of its chairman and chief financial officer.

A criminal investigation by federal prosecutors and a formal inquiry by the Securities and Exchange Commission were disclosed two days later.

“I’ve been worried about just this type of development for years,” Mr. Baker said. He said he feared the events might “touch even the smallest and most innocent participants in the housing market.”

Created by Congress 30 years ago to pump money into the multitrillion-dollar home-mortgage market, Fannie and Freddie, as they’re known, have grown explosively in recent years as they’ve snapped up home loans from banks and bundled them into securities for sale on Wall Street.

They’ve become so large, in fact — Freddie is No. 32 on the Fortune 500 list with $39.7 billion in revenue — that critics contend they are “too big to fail” and the government would bail them out if they collapsed.

They have a peculiar status among corporations whose stock is publicly traded. The companies are not directly guaranteed by the government, but they enjoy special privileges such as the ability to borrow directly from the Treasury. That makes their borrowing rates lower than the norm. Congressional budget experts estimate that Fannie and Freddie’s operational advantages are worth $10 billion or so.

The two also wield huge political influence on Capitol Hill and are savvy lobbyists as well as big contributors to both political parties. Moves in recent years to tighten regulation of Fannie and Freddie and curtail their privileges found scant support among lawmakers loath to rock the housing-market boat in a dreary economy.

As the two have grown and maneuvered the markets as sophisticated financial institutions, an increasing part of their business has been in derivatives, complex financial instruments they use to hedge interest-rate risks.

Derivatives: sound familiar? They played a role in the collapse of Enron in late 2001, were behind the near-demise of hedge fund Long-Term Capital Management in 1998 and have popped up in other financial scandals. Billionaire investor Warren Buffett called them “financial weapons of mass destruction.”

Add to that the fact that Fannie and Freddie have not been required to file periodic financial reports with the SEC as almost all publicly traded companies have to do. They voluntarily agreed to do so in July, at the height of the scandals and pressure for corporate accountability, but critics say that is insufficient and the government must require them to make the disclosures.

The turmoil engulfing Freddie has led to calls for tighter regulation — now even from the Bush administration — and, in some quarters, curtailment of the two companies’ privileges. Events still are unfolding, and the investigations are in early stages.

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