Mortgage giant Freddie Mac said Wednesday that it understated earnings by as much as $4.5 billion over three years, the result partly of a corporate push to portray steady growth to investors.
Gregory Parseghian, Freddie’s new CEO, said the announcement ”reflects poorly on past policies.”
Freddie Mac’s early morning announcement appeared to be a bid to ease jittery markets and to blunt a congressional hearing later at which financial experts criticized what they called lax government oversight of Freddie Mac and Fannie Mae, the other big, government-chartered mortgage investor.
Freddie Mac stock closed Wednesday at $50.83, up 1.6%. Shares had been trading above $60 before June 9, when directors forced departures of three top executives for failure to adequately address accounting problems flagged earlier in the year by the company’s new corporate auditor, PricewaterhouseCoopers.
Freddie Mac said that understated earnings for 2000-2002 are likely to total $1.5 billion to $4.5 billion, higher than most recent speculation. A precise restatement is expected during the July-October quarter, the company said.
It said its internal review blames both staff errors in applying standard accounting rules and conscious decisions to make earnings growth appear steady. Parseghian vowed reforms and said earnings will be more volatile in the future.
”I was more disconcerted by the statement than comforted,” said Rep. Richard Baker, R-La., the chief congressional critic of the mortgage behemoths charged by law with providing cheap, plentiful capital for home finance. Particularly disturbing, said Baker, was Freddie’s statement that earnings from previous years will be rolled into the restated results for 2000.
Baker presided over a hearing Wednesday in which experts portrayed Fannie and Freddie as woefully under-regulated and said their capital requirements pale in comparison with banks’.
A tiny federal agency with 146 employees and a $32 million budget the Office of Federal Housing Enterprise Oversight regulates the two mortgage giants, which have combined assets of $1.6 trillion. Days before the management shake-up, the OFHEO issued a positive report to Congress about the state of Freddie’s accounting.