- The Washington Times - Friday, November 21, 2003


Mortgage-market giant Freddie Mac disclosed yesterday that it had inflated its earnings for 2001 in financial reports by nearly $1 billion, the first time in its months-long accounting crisis that it acknowledged overstating profits.

And a review commissioned by the company, recently made public, found that Freddie Mac’s now-ousted top executives were aware of accounting manipulations used to draw a distorted picture of its finances. The review by a law firm also uncovered additional instances of transactions that apparently allowed the company to circumvent accounting and tax rules.

The disclosures came as the McLean company said its overall earnings for a three-year period are being restated higher by $5 billion in a long-awaited adjustment. The underreported earnings of $4.4 billion for 2000-2002 were close to what the government-sponsored company had estimated in September. In addition, Freddie Mac said $600 million had been underreported for periods before 2000.

Before yesterday’s report, Freddie Mac had acknowledged only understating its earnings, giving the company a unique status among other big corporations embroiled in accounting scandals. While other companies may have overstated profits, Freddie Mac has said executives understated its results for several years to smooth out volatility in profits and uphold its image on Wall Street as a steady performer.

Freddie Mac is the second-largest U.S. buyer of home mortgages, a publicly traded corporation with revenue of about $40 billion a year. It has ousted two chief executives since its accounting troubles came to light in early June and is under criminal investigation by the Justice Department and a civil inquiry by the Securities and Exchange Commission. The accounting debacle rattled Wall Street and the multitrillion-dollar home mortgage market.

Asked yesterday why the company didn’t disclose the $989 million overstatement earlier, when it made public the estimates of its underreported earnings, Freddie Mac executive Martin Baumann said, “There were many accounting corrections the company had to make.”

Mr. Baumann, the executive vice president for finance and chief financial officer, told reporters in a conference call that company auditors at PricewaterhouseCoopers had just completed Thursday the massive financial reckoning — a project announced in January.

The latest accounting change is expected to reduce Freddie Mac’s income by an equivalent amount during the next few years and make earnings more volatile. The company warned yesterday of further volatility to come, also saying that its restated results show “significantly greater” turbulence than it previously reported.

It said the error in its 2001 earnings — restated to $3.16 billion from $4.15 billion — was due to failure to properly account for losses from derivatives, the financial instruments that Freddie Mac and larger rival Fannie Mae use to hedge against swings in interest rates.

The head of the federal agency that oversees the two mortgage finance giants, which also is investigating Freddie Mac’s finances, noted that the company still must complete its accounting for much of 2003.

“The necessity of this restatement, and the magnitude of the accounting improprieties and management misconduct reinforce the need for [government] remediation and enforcement actions,” Armando Falcon, director of the Office of Federal Housing Enterprise Oversight, said in a statement.

The agency last month levied a $125,000 civil fine, the first monetary sanction in its 10-year history, on ousted Freddie Mac President David Glenn. Mr. Glenn is providing information in the agency’s investigation.

The company said yesterday that its financial condition was sound and its ability to manage risk uncompromised.

“The restatement is a significant step in Freddie Mac’s progress toward achieving accurate and timely financial reporting and controls,” said Shaun O’Malley, the company’s chairman. “Freddie Mac completed this restatement while maintaining our business momentum and delivering on our congressional mandate to lower mortgage costs for America’s homeowners.”

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. They have grown explosively in recent years.

The Bush administration earlier this year asked Congress for tighter federal supervision over the two companies.

In trading on the New York Stock Exchange, Freddie Mac shares closed up 3 cents at $55.67, after climbing as high as $57.95 earlier in the day.

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