U.S. Launches Probe of Freddie Mac

Federal prosecutors launched a criminal investigation Wednesday of possible misconduct at Freddie Mac, the government-chartered mortgage giant, as the company sought to stabilize the market for its debt by announcing the repurchase of up to $10 billion of outstanding notes and bonds.

The probe by U.S. Atty. Paul McNulty came two days after the McLean, Va.-based firm replaced most of its top management in connection with accounting irregularities that have kept the company from reporting financial results for more than a year.

The Securities and Exchange Commission also said it was launching a formal investigation of the firm, a move that will allow it to subpoena records and executives.

Although the company had replaced its top three executives, Freddie Mac said Wednesday that suspicion focused solely on the activities of former President David Glenn. But critics expressed skepticism about the firm’s account. “The only conclusion I can draw is that there is more to this story than the actions of one person,” said Rep. Richard H. Baker (R-La.), chairman of the House capital markets subcommittee, which oversees Freddie Mac. “We have not yet heard the end of this story.”

Glenn was fired after allegedly refusing to cooperate fully with an inquiry by an independent lawyer hired by Freddie Mac’s board of directors. He reportedly gave the lawyer business diaries that had been doctored or had pages removed.

Freddie Mac said the firm’s “unprecedented” repurchase of $10 billion of its debt today and Friday is meant to send a “loud and clear” signal that the company’s securities are sound. The company has $683.5 billion in outstanding debt.

Despite the removal of Glenn, the retirement of longtime Freddie Mac Chief Executive Leland C. Brendsel and the resignation of Executive Vice President Vaughn Clarke, little is known about the nature or extent of the company’s problems.

Freddie Mac said in January that it would restate its profit for 2000, 2001 and 2002, but it has yet to do so. Executives have suggested the restatements will increase, rather than decrease, its reported profit for those years. That has led independent observers to conclude that the firm may have manipulated what it said it was earning to make it appear that profit was on a steady upward arc.

But observers said earnings management of this sort, although improper and perhaps illegal, is not enough to explain either the abrupt departure of the executives or the start of a criminal investigation.

“When you put all the pieces together, it’s clear there is something pretty serious going on here,” said Bert Ely, a veteran banking industry consultant in Fairfax, Va. There are “more shoes to drop,” he said.

Analysts said they were worried Freddie Mac’s troubles could engulf the firm and its larger mortgage-industry sibling, Fannie Mae, and shake the nation’s housing sector, one of the few bright spots in the U.S. economy in recent years. The firms buy home mortgages from banks and package them into asset-backed securities that they sell or hold. Their activities are widely credited with keeping the nation’s housing market smooth-running and helping to make home ownership more affordable.

Freddie Mac said Wednesday that it would pay Brendsel his $1.18-million salary for two years and let him keep $21 million in stock and option grants. It said Glenn would be allowed to keep his pension but would receive no salary and would forfeit $11.2 million in stock and options.

Freddie Mac shares fell $1.50 to $50 on Wednesday on the New York Stock Exchange. Since Monday, the firm has lost about 16% of its value, or more than $7 billion.

Fannie Mae shares slipped 17 cents to $69.70, also on the NYSE.