Federal push ousts the CEO at Freddie Mac

The Seattle Times ^ | August 23, 2000 | Martin Crutsinger, Associated Press

[snopercod]

WASHINGTON — The chief executive of Freddie Mac and the corporation's general counsel are being replaced at the request of federal regulators as an investigation continues into the embattled mortgage giant's accounting practices.

Armando Falcon, the head of the Office of Federal Housing Enterprise, said yesterday that based on a review of the conduct of senior Freddie Mac officials, he had recommended the removal of Freddie Mac Chief Executive Gregory Parseghian and General Counsel Maud Mater.

Falcon said in a statement that he had concluded that the two officials "should be replaced." He said federal regulators would work with the corporation to ensure a "smooth transition."

Freddie Mac, the second-largest player in the multitrillion-dollar home-mortgage market, has been under fire since disclosing earlier this year that accounting errors and manipulations of internal accounts had resulted in the company's underreporting earnings by $1.5 billion to $4.5 billion over the past three years.

Parseghian, 42, had been chief executive and president of Freddie Mac only since June. He was selected after the mortgage giant ousted three top executives following disclosure of the accounting problems.

However, Parseghian — who had been Freddie Mac's chief investment officer from 1996 until being named CEO — had been dogged by questions over his role in the accounting transactions, which have triggered investigations by the Justice Department and the Securities and Exchange Commission.

Several lawsuits have been filed by shareholders since the company's troubles came to light. In one of those suits, Parseghian is alleged to have improperly sold Freddie Mac stock.

But earlier this month, Parseghian said in a statement that "I have nothing to hide here. There are only three occasions on which I have ever sold Freddie Mac stock and I remain heavily invested in the company."

Falcon, in a letter to Shaun O'Malley, the chairman of Freddie Mac's board of directors, said that Parseghian could stay on as head of Freddie Mac while a search for his successor was conducted.

But he said that federal regulators wanted the search conducted "expeditiously."

Falcon said the terms of Parseghian's severance package and that of the compensation package for Mater would be reviewed by his office.

"The board's compliance signals a commitment to cooperation and to ensuring the continued safe and sound operation of the corporation," Falcon said in his letter.

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

Sen. Jon Corzine, a New Jersey Democrat, plans to introduce a bill next month that would move the Office of Federal Housing Enterprise 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 be funded from assessments of the two institutions. Congress funds the current regulator.

Freddie Mac, a $40 billion-a-year company headquartered in McLean, Va., is No. 2 in the huge secondary market for mortgages behind Fannie Mae.

Information from Bloomberg News is included in this report.

[snopercod]

Uh-oh...

[snopercod]

What do you think of the timing of this announcement?

[Russell Scott]

If the home mortgage bubble burst before next fall, all bets are off on the next President.

[Glenn]

If the home mortgage bubble burst before next fall, all bets are off on the next President.

The sky is not falling. This is about accounting and not liquidity or underpinnings, as far as I can tell.

[Copernicus]

Yup. This may be the one.

Best regards,

[steve50]

The sky is not falling. This is about accounting and not liquidity or underpinnings, as far as I can tell.

This is about hedge funds and derivitives, Chicken Little just might be right this time.

[snopercod]

There were rumors on the street not long ago that some large entity got burned pretty badly when interests rates jumped sharply overnight. Could Freddie be the one?

[snopercod]

From this thread, Freddie Mac Will Restate Earnings Up $4.5 Billion of two months ago:

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.

[snopercod]

bump

[pointsal]

Better go take a look at the other quasi-government agencies....How do the books look at FARMER MAC?

[snopercod]

Is there such a thing?

About Freddie Mac

[tubebender]

I have noticed Freedie Mae doing a lot of advertising on radio and that just struck me as odd. It's more like a puff piece than retail marketing...

[tubebender]

...and why would a firm understate earnings by billions ?

[Southack]

"and why would a firm understate earnings by billions ?"

It's called sandbagging (or smoothing, depending upon where you live).

As the hired CEO, if you understate earnings then your Board of Directors sets **lower** corporate earnings targets for your own bonus rewards...which are easy to make by simply revealing a little more of your actual profit, as needed.

So you understate your earnings in order to make or blow away your earnings targets, allowing you to make out like a bandit (which is what you would be, if you used this trick) on your bonuses.

...And that's why these CEO's keep getting fired. Once the trick is discovered, everyone on the Board of directors slowly begins to realize that they've been played for suckers...paying out far too much money in undeserved bonuses to the CEO and his cronies.

[Dr. Scarpetta]

BUMP