- The Washington Times - Tuesday, July 22, 2003


The new chief financial officer of housing finance giant Freddie Mac told Congress yesterday that the company will fully disclose financial information as it remedies defects that led to its accounting problems.

“We know how to fix these shortcomings — and we will,” Martin Baumann told a House subcommittee hearing. “We will emerge stronger than ever, with significantly improved accounting and disclosure practices that will meet the highest standards. …There’s no excuse for Freddie Mac’s accounting problems other than it didn’t have the right controls in place.”

The chairman of the House Energy and Commerce subcommittee, Rep. Cliff Stearns, Florida Republican, said he will redouble his efforts to dramatically reform and simplify the complex accounting rules that enabled Freddie Mac to manipulate its books.

“Investors deserve significant change to enhance transparency and to standardize the financial statements of similar companies,” he said, blaming the Financial Standards Accounting Board’s obtuse, 800-page accounting rules for inviting corporate abuse.

A key senator, meanwhile, raised questions about President Bush’s nominee to head the federal agency that supervises Freddie Mac and Fannie Mae, its larger sister in the multitrillion-dollar home mortgage market.

The two government-sponsored yet publicly traded companies have come under tight scrutiny since Freddie Mac announced in early June that it had ousted three top executives and the Justice Department confirmed it was conducting a criminal investigation.

“Serious questions have been raised … as to whether he is the right person for this position at this time,” Sen. Paul S. Sarbanes of Maryland, senior Democrat on the Senate Banking, Housing and Urban Affairs Committee, said at the panel’s confirmation hearing for Mark Brickell — a financial executive and free-market advocate.

Referring to leadership of the agency that oversees the two companies, the Office of Federal Housing Enterprise Oversight, Mr. Sarbanes said: “This is clearly a critical role whose importance has only been heightened by recent events. The director of [the agency] requires a person of exceptional independence, judgment and commitment to [its] regulatory mission.”

Freddie Mac’s new leaders disclosed recently that it underreported earnings by $1.5 billion to $4.5 billion over the past three years. To resolve the errors, the company plans to restate past results adding back those profits. An equivalent amount would be deducted from earnings during the next few years.

The disclosure raised the question of whether the company purposely bent its accounting to smooth out volatility in its earnings, a practice generally frowned on by the Securities and Exchange Commission, which also is investigating the company’s accounting.

An internal investigation by attorneys hired by Freddie Mac’s board — which could be made public as early as today — is expected to show how the company manipulated earnings, according to a report in yesterday’s Wall Street Journal.

Mr. Baumann did not comment on the internal review in his testimony to the subcommittee, the first appearance before Congress by a Freddie Mac official since its accounting turmoil came to light. Freddie Mac spokesmen also declined to comment.

The review was led by Washington lawyer James Doty, who was an SEC general counsel in the first Bush administration.

Armando Falcon, the outgoing director of the Office of Federal Housing Enterprise Oversight, told Congress last week that Mr. Doty and the other attorneys conducting the review withheld some information from federal regulators in late May in their inquiry into Freddie Mac’s accounting.

Mr. Doty characterized Mr. Falcon’s statements as a “misunderstanding” and disputed his assertion that the regulators had asked the lawyers directly about the integrity of senior management.

It wasn’t until June 4 that the attorneys learned that then-President David Glenn had altered his records of meetings concerning the accounting review — information that they promptly disclosed to the regulators, said Mr. Doty.

Mr. Baumann testified that Freddie Mac is “unquestionably safe and sound” and its “business fundamentals are as strong as ever.”

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