- The Washington Times - Wednesday, June 25, 2003

ASSOCIATED PRESS

Accounting errors will boost past earnings of the second-largest financer in the home-mortgage market by as much as $4.5 billion but also likely reduce future profits, the new leaders of shaken-up Freddie Mac said yesterday.

The government-sponsored company, which ousted three top executives earlier this month, is under criminal investigation by federal prosecutors as the Securities and Exchange Commission examines its accounting. Company officials took pains to reassure investors that the problems were limited to accounting errors, and that its financial condition was sound and its ability to manage risk uncompromised.

The anticipated restatement of $1.5 billion to $4.5 billion for the last three years puts Freddie Mac, the Federal Home Mortgage Corp., among the biggest corporate accounting debacles of the past year or so. The McLean-based company said it “reflects poorly on Freddie Mac’s past accounting, control and disclosure practices.” The accounting change is expected to reduce income by an equivalent amount during the next few years and make earnings more volatile.

To address the problems, the officials said, Freddie Mac has strengthened its accounting pro-cesses and added new accounting staff while dismissing others. They did not address the question of whether deliberate manipulation of the company’s books might have been involved.

Another high-ranking executive, Senior Vice President and former Corporate Controller Gregory Reynolds, also left the company in recent days. The circumstances of his departure could not be determined immediately.

“Freddie Mac’s business continues full steam ahead,” the company’s new chairman, Shaun O’Malley, told financial analysts in a telephone conference call. “The company is focused on the future.”

The company said the errors are mainly a result of accounting for gains from derivatives, complex financial instruments it uses to hedge against swings in interest rates, and from mortgage securities.

Freddie Mac and Fannie Mae, the Federal National Mortgage Association, its larger sister in the multitrillion-dollar home mortgage market, buy loans from banks and other lenders and package them into securities for sale on Wall Street.

Disclosure of the estimated accounting error comes as Capitol Hill critics of the two big companies, which are congressionally chartered yet also publicly traded, insist that they are too weakly regulated. Lawmakers led by Rep. Richard H. Baker, Louisiana Republican, are proposing a measure prescribing tighter regulation and a change in the supervisory system for Freddie Mac and Fannie Mae.

Twice in recent days, Treasury Secretary John W. Snow has urged more stringent oversight of the two politically influential companies.

Freddie Mac shares rose 80 cents to close at $50.83, in trading yesterday on the New York Stock Exchange. The stock was down 15 percent from June 6, the last trading day before the company disclosed that two top executives were out and that regulators were investigating its accounting.

Freddie Mac, one of the biggest U.S. corporations with nearly $40 billion in revenue, stunned markets when it announced on June 9 that it had fired its president, David Glenn, for what it called his failure to fully cooperate in an internal accounting review. The company’s chairman and chief executive, Leland Brendsel, resigned along with the chief financial officer, Vaughn Clarke.

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