honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser
Posted on: Thursday, December 11, 2003

Freddie Mac hit with $125M fine

By Thomas A. Fogarty
USA Today

Regulators yesterday smacked giant mortgage investor Freddie Mac with a $125 million civil fine for accounting manipulation.

The fine, agreed to by Freddie Mac, is the largest levied by a financial regulator in a case with no demonstrated consumer losses.

In an accompanying report, the Office of Federal Housing Enterprise Oversight, regulator of Freddie Mac and corporate cousin Fannie Mae, assailed a management culture that "resulted in intense and sometimes improper efforts to manage its reported earnings."

Freddie and Fannie channel mortgage money from investors to lenders.

The OFHEO report says Freddie Mac's deceptive accounting was rooted in the company's desire to project to Wall Street a picture of steady earnings.

It said the company used non-standard accounting and transactions with no real substance to project itself as the "steady Freddie" expected by investment analysts.

Executive pay structure further reinforced the push by partially tying bonuses to short-term earnings, the report said. Meanwhile, inattentive directors "should have asked more questions," the report concluded.

Freddie Mac issued a statement voicing strong disagreement with some of the findings, but spokeswoman Sharon McHale declined to say which.

In January, Freddie Mac announced the need to revise earnings statements for three years ended last Dec. 31 after a new auditor objected to valuations of its risk-management contracts. Last month, the company issued revisions adding $5 billion to previous financial statements.

The accounting upheaval led in June to the ouster of former CEO Leland Brendsel in a management purge. In August, OFHEO forced the removal of CEO Greg Parseghian for his role in past accounting.

The fine is the first levied by tiny OFHEO in its 10-year history. Freddie Mac, which reported earnings of $10 billion in 2002, will pay the fine from current-quarter earnings, said McHale. It is not tax deductible.

Freddie Mac officials also agreed to structural reforms proposed by OFHEO to keep its accounting honest.

Among them, McHale said, is separation of the combined position of CEO and board chairman, which has been filled this week with the hiring of Richard Syron, executive chairman at Thermo Electron.

McHale said Syron is expected within three years to hire a replacement CEO at Freddie Mac while remaining as board chairman.

Freddie Mac shares closed yesterday at $54.25, up 25 cents.