Ex-Freddie Mac Chief Must Testify in Accounting Probe

Former Freddie Mac Chief Executive Leland Brendsel must testify in a special investigation of the accounting errors that led to a $5-billion earnings restatement, according to a court order.

Judge Leonie Brinkema of the U.S. District Court for the Eastern District of Virginia upheld a subpoena issued by the government-chartered company’s regulator, the Office of Federal Housing Enterprise Oversight, seeking testimony.

Brendsel and three other executives were ousted last year after the McLean, Va.-based company admitted circumventing accounting rules and using trades to reduce volatility in its earnings from 2000 to 2002. Brendsel has resisted the regulator’s request for testimony, saying that the agency violated federal laws and internal rules while seeking evidence.

“This is an important decision that upholds the authority of OFHEO to compel testimony as the agency continues to ensure the safety and soundness” of Freddie Mac and Fannie Mae, Director Armando Falcon said.

Brendsel’s lawyer, Brendan Sullivan, declined to comment.

The regulator on Dec. 10 said the company must pay a $125-million fine, and last week directed that Freddie Mac must keep 30% more capital on reserve than previously required at least until it releases financial statements for 2003. The regulator has been criticized by lawmakers such as Sen. Charles E. Schumer (D-N.Y.) for not identifying Freddie Mac’s accounting errors before disclosure by the company.

Also in December, the regulator said it would seek $33.9 million in fines and forfeited severance and benefits from Brendsel for his role in the company’s accounting. Brendsel resigned in June. He would be allowed to keep $29.4 million.

Freddie Mac and the larger Fannie Mae own or guarantee 42% of the $7-trillion U.S. mortgage market. The companies make money on the difference between the interest cost of debt they sell and the return received from home mortgages they buy from lenders, as well as fees charged to lenders for guarantees on bonds backed by pools of mortgages.

Meanwhile, the Bush administration said Freddie Mac and Fannie Mae were “highly leveraged” and needed a strong regulator with 25% more funding to prevent even a minor error from damaging financial markets.

The companies “hold much less capital in relation to their assets than similarly sized financial institutions,” the Office of Management and Budget said in its fiscal 2005 outlook. “Even a small mistake,” it said, “could have consequences throughout the economy.”

The White House proposed increasing funding for a regulator for Fannie Mae and Freddie Mac to $83 million from about $66 million.