Freddie Mac reports it overstated 2001 earnings

WASHINGTON -- Mortgage-market giant Freddie Mac disclosed Friday 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, newly 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 questionable transactions undertaken by executives to manipulate earnings.

The disclosures came as Freddie Mac said its overall earnings 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 that $600 million had been underreported for periods prior to 2000.

Prior to Friday's report, Freddie Mac had only acknowledged understating its earnings, giving the company a unique status among other big corporations embroiled in accounting scandals.

While other companies may have overstated earnings, Freddie Mac executives have said the company understated its results for several years to smooth out volatility in profits and uphold its image on Wall Street as a steady performer.

McLean, Va.-based Freddie Mac is the second-largest U.S. buyer of home mortgages, a publicly traded corporation with revenue of some $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 Friday why the company didn't disclose the $989 million overstatement earlier, Freddie Mac executive Martin Baumann said, "There were many accounting corrections the company had to make."

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 Friday 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.

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