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Freddie Mac Ousts Parseghian Amid Accounting

Aug 22, 2003 | Bloomberg

Freddie Mac ousted Chief Executive Officer Gregory Parseghian a month after he was implicated in a series of accounting irregularities at the second-largest buyer of U.S. mortgages, its regulator said.

The Office of Federal Housing Enterprise Oversight urged a management shakeup in meetings with company officials this week. Parseghian may remain as CEO while the government-chartered company searches for his successor, Ofheo said in an e-mail statement. The regulator also said Freddie Mac agreed to replace General Counsel Maud Mater.

The move comes a month after an investigation commissioned by the company showed Parseghian was involved in accounting errors that understated income by as much as $4.5 billion in his previous position as head of investments. McLean, Virginia-based Freddie Mac promoted Parseghian, 42, to chief executive in June after pushing out Chairman and CEO Leland Brendsel, President David Glenn and Chief Financial Officer Vaughn Clarke.

``The sooner you clean up your house, the better off you are,'' said Thomas Atteberry, assistant portfolio manager of the $1.4 billion FPA New Income Fund, which holds Freddie Mac debt. Accounting scandals at Enron Corp. and WorldCom Inc. in the past two years mean ``you have to be cleaner, you have to be more up front.'' Atteberry spoke in a telephone interview before Parseghian's ouster.

Freddie Mac spokesman David Palombi and two other company spokesmen didn't return repeated phone calls requesting comment.

Freddie Mac shares have fallen 17 percent since June 6, the Friday before the company ousted the three executives. The shares dropped $1.30 to $49.47 in New York Stock Exchange composite trading today.

`A Good Guy'

``I have concluded that CEO and President Greg Parseghian and General Counsel Maud Mater should be replaced,'' Ofheo Director Armand Falcon wrote in the statement. ``I have informed Freddie Mac's board of directors of my decision and they have agreed to comply.''

The company is under investigation by Ofheo, the Justice Department and the Securities and Exchange Commission.

For some investors, Parseghian's departure may be ``a modest negative because people think he's a good guy,'' said Ed Walczak, who manages the Vontobel U.S. Value Fund, which has 15 percent of assets invested in Freddie Mac and Fannie Mae. At the same time, ``the sooner this gets out and done with, the better.''

Freddie Mac today postponed a $2 billion sale of callable bonds to allow investors to ``digest information in the market,'' Freddie Mac Treasurer Louise Herrle said. The company has about $520 billion in bonds outstanding, Bloomberg figures show.

Yields on Freddie Mac's 10-year debt rose 2 basis points relative to U.S. Treasury notes today as investors demanded a higher premium on the company's obligations, said Jim Vogel, head of agency debt research at FTN Capital Markets in Memphis, Tennessee. A basis point is 0.01 percentage point.

Involvement

Reacting to the bookkeeping mistakes, Victory SBSF Capital Management in New York sold 582,000 Freddie Mac shares in late July, according to Victory analyst Hilary Hayes. ``We felt there were too many questions'' about the accountability of Freddie Mac's management, she said.

An investigation commissioned by the company reported on July 23 that Freddie Mac's management including Parseghian approved derivatives trades and misapplied accounting rules as a way to smooth fluctuations in earnings. Derivatives are contracts whose value is based on underlying assets, with most pegged to currencies or interest rates.

In September 2000, Parseghian was among executives who approved a plan to recalculate the value of some of its swaptions contracts giving the bearer the right to exchange fixed interest payments for floating rates, or vice versa which would have produced a $300 million gain, the report said.

Parseghian has said he was following the advice of the company's accounting and legal departments.

Scrutiny

The company's bookkeeping mistakes have intensified scrutiny of Freddie Mac and Fannie Mae in Congress, where some lawmakers want to strengthen regulation of the companies.

Senator Jon Corzine, a New Jersey Democrat, plans to introduce a bill next month that would move Ofheo to the Treasury Department from Housing and Urban Development. The bill gives detailed guidelines for portfolio management at the companies.

Three Republican Senators led by Chuck Hagel of Nebraska have sponsored legislation that would specify the types of assets Fannie Mae and Freddie Mac can hold. Under the rules, the new regulator would derive its budget from assessments of the two institutions. Congress funds the current regulator.

`Wearing Thin'

When Parseghian, a former Salomon Brothers trader, was appointed CEO, some investors said he was the right person to calm concerns that bigger accounting problems lurked.

New Freddie Mac Chairman Shaun O'Malley, in a letter published on its Web site two weeks ago, affirmed the board's choice for naming Parseghian CEO, calling him ``absolutely the right leader.'' The letter responded to a July 28 Washington Post column by Jerry Knight suggesting that the company needed to get rid of Parseghian and the board of directors.

As chief investment officer, Parseghian managed the company's $570 billion mortgage portfolio, helping to quadruple profit to $5.76 billion last year from $1.24 billion in 1996.

Before joining Freddie Mac in January 1996, he served as a managing director at Solomon in charge of collateralized mortgage obligations and mortgage-derivative trading. During his first conference call as CEO on June 9, he referred to allegations of fraud and bookkeeping irregularities, and said the patience of investors was ``wearing thin.''


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