Posted on: Thursday, July 24, 2003

Numerous errors cited at Freddie Mac

By Marcy Gordon
Associated Press

WASHINGTON — Pushing to meet Wall Street's earnings forecasts, housing finance giant Freddie Mac violated accounting rules as executives withheld information from company directors and investors, investigators said yesterday.

The inquiry found numerous accounting errors and manipulations of internal accounts that resulted in the government-sponsored company underreporting its earnings by $1.5 billion to $4.5 billion from 2000-02. It is among the biggest corporate accounting failures of recent years.

Some of the questionable transactions "may have gone beyond simple error," said James Doty, the Washington lawyer who led the six-month-long review conducted at the request of Freddie Mac's board of directors.

The report paints, in many cases, "an unflattering and critical portrait" of company practices, new Freddie Mac Chairman Shaun O'Malley told analysts in a conference call.

"This is a painful day for Freddie Mac," O'Malley said.

The 100-page report details breaches of accounting rules in an effort by executives to smooth out volatility in earnings, meet analysts' expectations and maintain the image of a well-managed, reliable company dubbed "Steady Freddie" on Wall Street.

The company is one of the nation's biggest and is the second-largest player in the multitrillion-dollar home mortgage market.

It has come under scrutiny since it announced in early June that it had ousted three top executives and the Justice Department confirmed that it was conducting a criminal investigation.

The disclosures stunned the financial world and threatened to shake the housing market, a rare bright spot in the gloomy economy.

In their zeal to maintain the company's steady image, Freddie Mac's top managers withheld information from company directors and investors and shrouded some complex transactions in secrecy, sometimes by using an outside broker in the deals, the inquiry found.

But, Doty said, "This is not a story of rampant criminal conduct or abuse of authority for personal gain."

According to the report: "The events exhibit an approach by senior management to maintaining a public corporate image at the expense of good management practices and effectiveness of internal controls."