Tough Times Continue For Freddie MacAug 24, 2003 | www,ft.com
Freddie Mac, the US mortgage financier embroiled in an accounting scandal, is having a tough time getting its affairs in order.
A month ago, the financier released the results of an independent investigation into its financial statements, a 107-page report showing how former executives "managed" the company's earnings to maintain a smooth flow of profits.
Freddie's board said the release of the report marked "a painful day" for the company. It placed its faith in its new chief executive, Gregory Parseghian, to sort out the company's problems and restore its credibility.
But now Mr Parseghian formerly Freddie's chief investment officer has been dismissed, after Freddie's regulator became uncomfortable with his involvement in some of the company's more questionable accounting practices.
Armando Falcon, director of the Office of Federal Housing Enterprise Oversight, said on Friday that he had directed Freddie's board to replace Mr Parseghian, and start an "immediate" search for a successor. The regulator has also told Freddie to replace its general counsel, Maud Mater.
The regulator's directive is understood to have been met with some reservation by Freddie's board, which has stood firmly behind Mr Parseghian over the past month even as investors and analysts have questioned his suitability to lead the company.
The independent report released last month by law firm Baker Botts showed that Mr Parseghian was involved with some financial transactions that did not comply with accounting rules.
At the time, the board claimed Mr Parseghian's involvement was "not wrongful involvement" and that he was implementing policies set by corporate accounting and other senior officers rather than devising and directing the policies.
However, analysts have questioned Mr Parseghian's actions. Janet Tavakoli, president of Tavakoli Structured Finance, a consultancy firm, said it was "difficult to imagine" that Mr Parseghian would have been unaware of the implications of some of the transactions in which he was involved.
In early August, analysts at Fox-Pitt, Kelton noted investor questioning of Mr Parseghian's "appropriateness" to serve as CEO, and said in a report that he and other new management "have a steep hill to climb to restore shareholders' confidence in the company".
OFHEO is understood to have been evaluating Mr Parseghian's involvement, and to have come to the conclusion that he played a larger role in some of the questionable transactions than was previously thought.
Meanwhile, investors have become increasingly disenchanted while awaiting Freddie's accounting restatement, which the company plans to complete this quarter. Freddie's stock has fallen 16 per cent to $49.97 since early June, when it first announced that it had got rid of three top executives, including former chief executive Leland Brendsel, after finding they had violated accounting rules.
Freddie is now facing a host of lawsuits from shareholders. Ohio attorney general Jim Petro claims two of the state's public retirement systems have lost more than $25m because of Freddie's failure to comply with accounting rules.
Bond investors have also become more circumspect, with the value of Freddie's so-called "agency" debt securities falling sharply over the past two months.