Freddie’s Profit Revision Grows
Freddie Mac, the second-largest source of mortgage financing in the U.S., said Wednesday that it understated profit by as much as $4.5 billion for the last three years, in part because executives sought to make earnings less volatile.
The company blamed its accountants, both internal and external, and said that the increase in earnings for the last three years would be offset by decreases in future years.
The increase in profit brought a rebuke from Rep. Richard H. Baker (R. La.), who has introduced legislation to shift regulation of Freddie Mac and Fannie Mae to the Treasury Department. He charged that the restatement hurt investors who sold the shares.
“If you were a former shareholder in Freddie Mac, and you sold your interest in the company before the balance adjustment was corrected, you were denied your fair distribution of company earnings by this unfortunate manipulation,” Baker, chairman of the House capital markets subcommittee, said during a Washington hearing.
Changes in the way Freddie Mac accounted for “several hundred thousand” derivatives contracts will require the McLean, Va.-based company to add $1.5 billion to $4.5 billion to its earnings for 2000 through 2002 and cut future growth.
The new figures were larger than the high range of $3 billion sources last week told the Wall Street Journal.
Wall Street expressed relief at Wednesday’s announcement, pushing Freddie Mac shares up as investors gained a clearer picture of the size of the restatement and cheered management’s move to fix the accounting mess. The shares rose 80 cents, or 1.6%, to $50.83 on the New York Stock Exchange.
An audit determining the size of the restatements will be completed in the third quarter, Freddie Mac spokesman David Palombi said.
“They were basically trying to smooth earnings, so it’s a problem of riches rather than trying to hide losses,” said Peter Cordrey, who has been buying Freddie Mac bonds for the $135 billion in fixed income investments he helps manage at Prudential Investment Management in Newark, New Jersey.
Freddie Mac had reported total net income of $12.5 billion for 2000, 2001 and 2002. The company may use the increase in capital resulting from the higher earnings to expand the business, repurchase debt or stock or boost dividends, Chief Executive Greg Parseghian said during a conference call with investors and analysts.
The accounting irregularities probably will empower critics seeking greater oversight of Freddie Mac and Fannie Mae, two shareholder-owned, government-sponsored enterprises that are not required to make regular Securities and Exchange Commission filings. The disclosures fell short of standards that would be required under SEC guidelines, the company said.
Baker is winning support for his bill that would let the Treasury Department oversee Fannie Mae and Freddie Mac, which together own or guarantee 42% of the $7-trillion U.S. mortgage market. to the full Financial Services Committee. The bill would eliminate the current overseer, the Office of Federal Housing Enterprise Oversight.
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Bloomberg News and Reuters were used in compiling this report.
