- The Washington Times - Monday, June 9, 2003

Freddie Mac fired its top executive and accepted resignations from two others yesterday after the country’s second-largest mortgage buyer admitted employee misconduct associated with an internal investigation into its accounting.

In a surprise shake-up, the government-sponsored enterprise (GSE) said it had fired its president and chief operating officer, David Glenn, and that Chairman and Chief Executive Leland Brendsel had resigned. Vaughn Clarke, the company’s executive vice president and chief financial officer, also resigned.

The news sent shares of the McLean company tumbling. They fell $9.61, or 16 percent, to close at $50.26, a 52-week low, on the New York Stock Exchange.

Federal Home Mortgage Corp. officials said yesterday that Mr. Glenn violated company rules by refusing to cooperate with an investigation into accounting problems. The company said in January that it would restate earnings for 2000, 2001 and 2002 because of changes in accounting for derivatives.

Freddie Mac said Mr. Glenn edited and removed portions of a personal diary that an independent counsel had requested. The company said there were “serious questions as to the timeliness and completeness of his cooperation and candor with the Board’s Audit Committee Counsel.”

Freddie Mac’s federal regulator sent a letter to the company’s board of directors Saturday expressing concern about Mr. Glenn’s behavior.

“I have become increasingly concerned about evidence that has come to light of weakness in controls and personnel expertise in accounting areas and misconduct on the part of Freddie Mac employees,” wrote Armando Falcon Jr., director of the Office of Housing Enterprise Oversight.

Congress created the GSEs to lower the cost of capital for certain kinds of borrowing. Sallie Mae, which buys student loans, and Fannie Mae, which also buys mortgages, are similarly structured.

Although they are publicly traded, they are not required to file certain financial reports with the Securities and Exchange Commission. Some lawmakers have said the government-sponsored enterprises should be regulated more closely.

Record-low mortgage rates have resulted in more home buying and refinancing, creating more business for Freddie Mac and Fannie Mae.

Mr. Falcon said the management shake-up at Freddie Mac was a good step but that more changes are needed.

Specifically, he directed Freddie Mac to submit a plan to reform how the board of directors oversees management and accounting, and said his office would form a team to investigate the reauditing of finances. Also, the agency said it would object if Freddie Mac rehired Mr. Glenn.

The diary contained notes about company meetings and actions but is not an official company document.

Freddie Mac said Mr. Glenn’s actions would not necessitate further restatements or accounting adjustments. The federal agency said the company’s financial position remains strong.

The board promoted Executive Vice President Gregory J. Parseghian to president and CEO and named director Shaun O’Malley chairman. Mr. O’Malley will not be on the management team.

“As the nonexecutive chairman, I will work closely with [Mr. Parseghian] and his team to ensure that Freddie Mac resolves its financial reporting issues in a complete and timely manner,” Mr. O’Malley said in a conference call.

Analysts said the management changes were a positive step for a company in turmoil, but said delays in the restatement process could hurt earnings.

“The company did not change any language on its guidance … but did announce that the re-audit will now be delayed further into the third quarter — possibly September,” said Merrill Lynch analyst Michael Hughes in a research note. “This is a clear negative.”

Mr. Hughes downgraded his rating from “buy” to “neutral” and indicated the government could place more scrutiny on the company.

Merrill Lynch controls more than 2.3 million shares of Freddie Mac.

Debt-ratings agencies reaffirmed their rating on Freddie Mac but said they will watch the company closely.

“Any sustained loss of investor confidence could directly impact the company’s profitability, liquidity position, and capital generation abilities going forward,” Fitch Ratings said in a news release. Fitch rates Freddie Mac’s long-term debt “AAA,” the highest level.

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