Ending a three-month stretch with no new major corporate scandals, an accounting probe at mortgage powerhouse Freddie Mac led to the termination of its president on Monday and the departures of two other top executives.
Freddie Mac, a government-chartered, private mortgage corporation, said it fired president David Glenn because he had not cooperated with an internal review of its accounting practices when he altered and removed pages from a journal that he kept of his daily business activities. The review had to do with a previously announced restatement of Freddie Mac’s 2000, 2001 and 2002 results.
CEO Leland Brendsel retired and Vaughn Clarke, chief financial officer, resigned. The board decided it was in the company’s best interest ”to move forward with new leadership,” Brendsel said in a statement.
Newly appointed CEO Gregory Parseghian called the day’s events ”appalling.” In an interview, Parseghian said, ”This is not the Freddie Mac that we’ve built over time or the type of behavior that we condone.”
News of the shake-up sent tremors through financial markets sensitive to scandal news. But analysts say any fallout from Freddie Mac’s problems is likely to be muted. Freddie Mac and its larger counterpart, Fannie Mae, don’t lend money to home buyers. Instead, they buy mortgages from lenders and resell them to investors, providing financing for more loans.
Freddie Mac’s problems shouldn’t affect individual homeowners. ”The average guy on the street will say, ‘So what?’ ” says Paul Havemann, vice president of HSH Associates, a mortgage information service. Jim Fowler, mortgage financing analyst at JMP Securities, agrees that there shouldn’t be any disruption to the smooth functioning of the mortgage market.
The consequences for Freddie Mac are less clear. The Office of Federal Housing Enterprise Oversight, which regulates Freddie Mac and Fannie Mae, said it is deploying a special team to investigate the re-audit and employee misconduct. Though Standard & Poor’s and Fitch Ratings affirmed Freddie Mac’s bond ratings, several Wall Street firms downgraded its stock, sending it down $9.61 to $50.26, a 16% loss.
Freddie Mac’s problems began Jan. 22, when it said that its 2002, 2001 and 2000 results would be subject to revision because it had switched auditors, going to PricewaterhouseCoopers from the now-defunct Arthur Andersen. The review revealed that the company had misapplied accounting rules. ”We’re correcting the errors,” Parseghian said. ”This is not about transactions the firm didn’t know about.”
Freddie Mac hired a special investigator to look into the matter and told employees to cooperate. On June 4, Glenn went to the special investigator and acknowledged altering his journal, though exactly what he changed and why is still not known.