Freddie Mac Agrees to Pay $125-Million Fine
Freddie Mac, the No. 2 U.S. home finance company, has agreed to a penalty of $125 million to settle regulators’ accusations that it manipulated earnings. The company still could face additional restrictions until it gets its books in order.
The Office of Federal Housing Enterprise Oversight said Wednesday that Freddie Mac, which is chartered by Congress to help expand U.S. homeownership, ignored accounting rules and made transactions for the sole purpose of masking earnings volatility.
“Weaknesses existed in every aspect of Freddie Mac’s accounting process,” the agency’s director, Armando Falcon, said in a statement.
Although Freddie Mac named a new chief executive Sunday after a summer of upheaval, the company faces additional challenges before it can move beyond the full effects of a $5-billion earnings restatement and accounting scandal.
The results of investigations of the restatement by securities regulators and law enforcement officials are yet to come, as are legislative efforts to strengthen oversight of Freddie Mac.
The company’s tangled accounts may take a year or more to straighten out, Falcon said. The regulator is considering restricting the growth of Freddie Mac’s mortgage portfolio and requiring the company to hold additional capital against risk until it brings its financial reports up to date, which may not happen until early 2005, he said.
Analysts said both steps probably would crimp the company’s earnings.
Freddie Mac is not expected to report its 2003 earnings until the middle of next year. The company is not likely to resume regular quarterly earnings reports until late 2004 or early in the following year, and is not expected to begin making standard disclosures to the Securities and Exchange Commission until 2005, regulatory officials said.
Analysts said market response to the penalty was muted.
“The fine in the grand scheme is insignificant. What is important are the steps being taken to correct the problems,” said Colin Lundgren at American Express Asset Management.
Shares of McLean, Va.-based Freddie Mac closed up 25 cents at $54.25 on the New York Stock Exchange.
Freddie Mac Chairman Shaun O’Malley said in a statement that the settlement was a step toward restoring investor confidence in the company. But he said Freddie Mac “strongly disagrees” with parts of the regulator’s report, although he did not detail his objections.
