Freddie Mac says restatement will add to past earnings, cut future profits

Wednesday, June 25th 2003, 12:00 am
By: News On 6

WASHINGTON (AP) _ Beleaguered mortgage-market giant Freddie Mac said Wednesday it expects to restate earnings for the past three years higher by $1.5 billion to $4.5 billion, a shift that will likely crimp future profits.

Officials of the government-sponsored company, which ousted three top executives earlier this month and is under investigation by federal prosecutors and securities regulators, took pains to reassure investors that the problems were limited to accounting errors, that its financial condition was sound and that its ability to manage risk uncompromised.

``Freddie Mac's business continues full steam ahead,'' the company's new chairman, Shaun O'Malley, told financial analysts Wednesday in a telephone conference call. ``The company is focused on the future.''

The company did acknowledge, however, that the anticipated correction ``reflects poorly on Freddie Mac's past accounting, control and disclosure practices.''

And it said the restatement is expected to reduce its income by an equivalent amount during the next few years and make its financial results more turbulent.

The company said the errors were mainly due to its accounting for gains from derivatives, complex financial instruments it uses to hedge against swings in interest rates, and from mortgage securities.

Freddie Mac and Fannie Mae, its larger sister in the multitrillion-dollar home mortgage market, buy home loans from banks and other lenders and package them into securities for sale on Wall Street.

Disclosure of the estimated accounting error came as Capitol Hill critics of the two big companies, which are congressionally chartered yet also publicly traded, insisted that they are too weakly regulated. Lawmakers led by Rep. Richard Baker, R-La., are proposing tighter regulation and a change in the supervisory system for Freddie Mac and Fannie Mae.

``The idea that giant companies with ties to the federal government and taxpayer pockets should have less instead of more regulatory safeguards in place is unthinkable, especially in light of the financial scandals we've witnessed over the last two years,'' Baker said at a hearing of his House Financial Services subcommittee.

Twice in recent days, Treasury Secretary John Snow has urged more stringent oversight of the two politically influential companies.

Freddie Mac shares rose $2.19, or more than 4 percent, to $52.22, in morning trading on the New York Stock Exchange, where Fannie Mae shares gained 71 cents to $69.71.

Attorneys hired to conduct a review found that the faulty accounting was caused by a lack of accounting expertise among Freddie Mac employees, inadequate control procedures and ``numerous errors'' in applying accounting principles, company officials said. They did not address the question of whether deliberate manipulation of the company's books might have been involved.

Freddie Mac said it has strengthened its accounting processes and added new staff to address the problems.

Officials expect to complete the audit in the next few months and said the actual restatement could differ from the range given Wednesday.

McLean, Va.-based Freddie Mac, one of the biggest U.S. corporations with nearly $40 billion in revenue, stunned markets by announcing it had fired its president, David Glenn, for what it called his failure to fully cooperate in an internal accounting review. The company's chairman and chief executive, Leland Brendsel, resigned along with the chief financial officer, Vaughn Clarke.

Brendsel left with a $24 million compensation package. Glenn forfeited his departure salary and bonus, and some $11 million in company stock options to which he had not yet taken title, but keeps options worth $5.3 million. The federal agency that supervises Freddie Mac and Fannie Mae is reviewing the compensation deals.

Freddie Mac fired Arthur Andersen LLP as its auditing firm in March 2002, replacing it with PricewaterhouseCoopers _ which is conducting the ongoing accounting review.