Freddie Mac Probe Widens to Wall St.

U.S. regulators are investigating the roles Wall Street firms played in questionable deals that mortgage finance company Freddie Mac devised to massage earnings, an official said Tuesday.

Brokerage giants Morgan Stanley and Salomon Smith Barney, now a Citigroup Inc. unit, were among the firms that executed the deals, an independent counsel hired by Freddie Mac to investigate its accounting problems told Congress in September.

Freddie Mac in July released an independent report that said company investment officers had created trades that had no benefit for the company other than to record earnings in future quarters in order to make it easier to meet earnings targets. The report said the transactions were executed by at least five parties.

“We are in the process of reviewing the counterparties’ roles in transactions relevant to our investigation,” said Corinne Russell, a spokeswoman for the Office of Federal Housing Enterprise Oversight.

In an extreme case, Freddie Mac and its larger mortgage finance cousin, Fannie Mae, could be barred from doing business with the Wall Street companies involved. Representatives of those companies declined to comment.

The agency launched its probe this summer after government-sponsored, shareholder-owned Freddie Mac rattled investors by replacing top executives over accounting irregularities it acknowledged were central to a three-year earnings restatement estimated at about $4.5 billion.

Shares of Freddie Mac fell $1.12 to $53.28, Citigroup fell 74 cents to $45.56, and Morgan Stanley dropped $1.21 to $53.82, all on the New York Stock Exchange.