WASHINGTON -- Freddie Mac is paying a $125 million fine and faces possible curbs on its growth as federal regulators blame management misconduct for a $5 billion misstatement of earnings by the second-largest U.S. buyer of home mortgages.
In a report Wednesday, regulators accused the government-sponsored company of violating its public trust.
A pliant board of directors and a system of compensating executives tied to annual earnings targets contributed to an accounting crisis that has brought down four leading Freddie Mac executives since June, the Office of Federal Housing Enterprise Oversight found.
Freddie Mac agreed to pay the record fine in a settlement announced Wednesday with the federal agency.
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 Freddie Mac and even "a disdain for appropriate disclosure standards" among former top executives.
The company "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 already 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; that prospect is 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 rapidly in recent years and are among the nation's largest financial institutions.
Freddie Mac's settlement still leaves unresolved a criminal investigation by the Justice Department and a civil inquiry by the Securities and Exchange Commission.
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, Va.-based Freddie Mac, with $40 billion revenue a year, has acknowledged understating its earnings by $5 billion for 2000-2002 to smooth out volatility in profits and uphold its image on Wall Street as a steady performer. In addition, the company last month admitted inflating 2001 earnings by nearly $1 billion and said it may not be able to complete its accounting for 2003 until next 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 company did not admit to or deny wrongdoing in the settlement, involving the first such fine in the agency's 10-year history. Freddie Mac also said it did not consent to any part of the agency's report and that it "strongly disagrees" with some of the findings.
The $125 million fine will be paid out of the company's revenues, potentially reducing its bottom line. The restatement by company auditors of Freddie Mac's 2000-2002 earnings, a massive project first announced in January and completed last month, cost the company $100 million.
Freddie Mac shares rose 25 cents to $54.25 in trading Wednesday on the New York Stock Exchange.
"This settlement and the resulting reforms represent an important step toward the goal of restoring the full confidence of our investors and the public," Freddie Mac chairman Shaun O'Malley said in a statement.
On the Net:
Freddie Mac: http://www.freddiemac.com
Office of Federal Housing Enterprise Oversight: http://www.ofheo.gov
Fannie Mae: http://www.fanniemae.com