Freddie Mac in more trouble over earnings drive

WASHINGTON -- In a drive to meet Wall Street's expectations for earnings, housing finance giant Freddie Mac engaged in transactions that violated accounting rules as senior executives withheld information from company directors and investors, an investigation made public Wednesday has found.

The internal review conducted by attorneys hired by Freddie Mac's board of directors paints, in many cases, "an unflattering and critical portrait" of company practices, Chairman Shaun O'Malley told financial analysts in a telephone conference call.

"This is a painful day for Freddie Mac," he said.

The government-sponsored yet publicly traded company, which is the second-largest player in the multitrillion-dollar home mortgage market, has come under tight scrutiny since it announced in early June that it had ousted three top executives and the Justice Department confirmed it was conducting a criminal investigation.

Freddie Mac's new leaders disclosed last month that the company underreported earnings by $1.5 billion to $4.5 billion in 2000-2002, putting it among the biggest corporate accounting failures of recent 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.

The attorney who led the internal review said Wednesday that the smoothing engaged in by Freddie Mac executives -- sometimes without consulting the company's auditors at Arthur Andersen LLP -- did violate accounting rules and financial disclosure requirements.

However, he said, there was no evidence of criminal conduct or abuse of authority for personal gain by the company executives.

A key senator, meanwhile, raised questions Tuesday about President Bush's nominee to head the federal agency that supervises Freddie Mac and Fannie Mae, its larger sister in the housing finance market.

"Serious questions have been raised ... as to whether he is the right person for this position at this time," Sen. Paul Sarbanes of Maryland, senior Democrat on the Senate Banking Committee, said at the panel's confirmation hearing for Mark Brickell -- a financial executive and free-market advocate -- to head the Office of Federal Housing Enterprise Oversight.

Freddie Mac's new chief financial officer, Martin Baumann, told a House subcommittee hearing on Tuesday: "We know how to fix these shortcomings -- and we will. 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."

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

He did not comment on the internal review in his testimony to a House Energy and Commerce panel, the first appearance before Congress by a Freddie Mac official since the company's accounting turmoil came to light. Freddie Mac spokesmen also declined to comment Tuesday.

The review was led by Washington attorney 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 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.

Doty characterized 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 Doty.


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