- The Washington Times - Wednesday, December 10, 2003


Freddie Mac is being threatened with curbs on its growth as federal regulators blame management misconduct for the mortgage giant’s $5 billion misstatement of earnings.

In a report issued yesterday, regulators accused the government-sponsored company of violating its public trust.

A pliant board of directors and a system tying executive compensation to annual earnings also contributed to the accounting fiasco at Freddie Mac that has brought the ouster of four top executives since early June, the Office of Federal Housing Enterprise Oversight found in its months-long investigation.

Freddie Mac agreed to pay a record $125 million civil fine in a settlement with the federal agency announced yesterday.

The agency, which supervises Freddie Mac and its larger rival Fannie Mae in the multitrillion-dollar home mortgage market, cited “a pattern of inappropriate conduct and improper management of earnings” at the company and even “a disdain for appropriate disclosure standards” among former top executives.

The second-largest U.S. buyer of home mortgages “disregarded accounting rules, internal controls, disclosure standards, and ultimately, the public trust in pursuit of steady earnings growth,” the agency’s report found.

Its director, Armando Falcon, told reporters the agency is considering imposing on both mortgage companies new requirements recommended in the report, including splitting the chairman and chief executive positions and limiting directors’ terms.

Another recommendation is to restrain the growth of Freddie Mac’s mortgage portfolio if it fails to disclose its financial situation more quickly and accurately — a prospect likely to unnerve shareholders.

Freddie Mac and Fannie Mae were created by Congress to pump money into the home mortgage market, by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street. The two corporations, whose stock is publicly traded, have grown explosively in recent years and are among the nation’s largest financial institutions.

Freddie Mac’s settlement with the regulators still leaves to be resolved a criminal investigation by the Justice Department and a civil inquiry by the Securities and Exchange Commission.

Mr. Falcon said his agency’s examination did not find evidence of criminal misconduct. The report did cite evidence that one or more of the investment banks that engaged in transactions that Freddie Mac used to manipulate its earnings “may not have acted properly.”

McLean-based Freddie Mac, with $40 billion in annual revenue, has acknowledged understating its earnings by $5 billion for 2000-02 to smooth out volatility in profits and uphold its image as a steady performer.

In addition, the company last month admitted inflating 2001 earnings by nearly $1 billion and said it might not be able to complete its accounting for 2003 until June.

The company on Sunday named Richard Syron, a Wall Street veteran and former Federal Reserve official, as its new chairman and chief executive. The board of directors in June forced out Leland Brendsel as chairman and chief executive, along with the Freddie Mac’s president and chief financial officer.

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