- The Washington Times - Sunday, June 22, 2003

A tremor ran through one of the pillars of America’s financial system recently, when federal regulators launched investigations of Freddie Mac, America’s second-largest buyer of mortgages. Freddie Mac’s shares fell 16 percent in one day after it announced its management shake-up in June, but have since recovered some ground.

On Thursday, the Wall Street Journal reported that Freddie Mac may restate its earnings by $1 billion to $3 billion. The move could reduce net income during the next few years, since the restatement appears to be due to futures contracts it made to hedge interest-rate risk, known as derivatives. Freddie Mac earned $5.8 billion last year and $4.2 billion in 2001.

Some analysts say the restatements won’t alter the value of the company, and that the accounting problems don’t appear to have been generated by Enron-style book-cooking. Instead, the revised accounting is probably due to changes in the time periods that the company reported legitimate gains. But Freddie Mac’s new chief executive, Greg Parseghian, has said the company has uncovered additional accounting issues.

The uncertainties behind accounting at the company have exposed underlying concerns regarding Freddie Mac, and its close relative, Fannie Mae. In 1970, Congress gave Freddie Mac its charter, and Fannie Mae completed its transformation from a public company to a government-sponsored private corporation. Both companies are among the four largest financial institutions in America. Freddie and Fannie buy mortgages from banks and savings and loans. They also package mortgages they have purchased and sell them as securities they guarantee, known as mortgage-backed securities. These securities are traded on Wall Street. The activities of Fannie and Freddie have made the mortgage market extremely liquid, which has in turn made buying a home much easier in America.

Freddie Mac and Fannie Mae own or guarantee almost half of all mortgages in America, a multi-trillion-dollar market. Over the past five years, their investment portfolios have doubled to over $1 trillion. But they have not reached this size through the workings of market forces alone.

The institutions are exempt from some of the disclosure requirements that all other publicly traded companies must comply with, and from state and local taxes. The Treasury Department has the right to purchase up to $2.25 billion worth of Freddie and Fannie debt.

Given the enormous importance of Freddie and Fannie, proposals by some legislators to heighten disclosure requirements make sense. Should these two companies wrack up liabilities investors aren’t aware of without properly hedging their exposure, the results could be catastrophic. But Congress shouldn’t overplay its hand. Freddie and Fannie’s business has helped fuel the ongoing real-estate boom — providing critical locomotion right now for the economy as a whole.

Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.


Click to Read More and View Comments

Click to Hide