US broadens Freddie Mac probe to Wall Street role

Biz.Yahoo/Reuters ^ | November 18, 2003

[lelio]

See Freddie Mac overstated 2001 results by $1B. Here's the meat of the article:

The mortgage-finance company, which has been embroiled in an accounting scandal since June, is still expected to conclude that it undercounted earnings by $4.5 billion or more during the entire three-year period of its restatement, which covers 2000, 2001 and 2002. But an overstatement during one of those years would be significant because it would further highlight the volatility of Freddie Mac's (FRE, news) financial results, something the company had tried to hide. Freddie Mac (FRE, news) initially reported that it earned $4.1 billion in 2001.

Why did they undercount? That doesn't seem to make sense. Perhaps they wanted to keep competitors out of the field by making it look like they were barely able to make a profit?

[lelio]

Inside rumor is that WAMU, the largest mtg portfolio is going into selling part of it off for cash.

They're also laying of 4k of their 22k employees in the home-loan operations.

From a Seattle Times article (you have to register to read it, search on "WaMu") they lost $271M "on WaMu's mortgage loans related to the financial instruments it uses to balance the risk of rate changes" in Q3.

[Starwind]

Why did they undercount? That doesn't seem to make sense. Supposedly they were "smoothing" earnings out year to year so as not to spook wall street with a volatile 'down year'.

I suspect there's a bit more to it, as in how volatile and what are the risks?

Their restated results are at FREDDIE MAC ANNOUNCES RESTATEMENT RESULTS

All the financials are linked on that page, as well as the Baker-Botts internal investigation report from July (see 'Supplemental Board Report').

The derivatives and special-purpose-entities (the off-book shell companies set up to hide the gains/losses) are discussed in 'Part III' (see section 4 of the report). Biggest problem with the report is that the .pdf file is a scan of the original, hence it is an image and you can't do text search - you gotta read it. The table of contents is helpful to narrow your search though.

[Starwind]

Freddie delaying 2003 earnings due to prior errors
Friday November 21, 9:20 am ET

NEW YORK, Nov 21 (Reuters) - Freddie Mac (NYSE:FRE - News), the No. 2 U.S. mortgage finance company, is delaying the reporting of its 2003 earnings as a result of prior accounting errors that forced the company to upwardly revise past earnings by $5 billion.

The company said earlier Friday that it expects to release its 2003 results by June 30, 2004.

"There were a lot of accounting mistakes made," said Martin Baumann, Freddie Mac's chief financial officer, in a conference call with analysts. "We need to correct our (accounting) infrastructure."

The company earlier Friday said it overstated earnings by $989 million in 2001 and understated profit by more than $5 billion in 2000 and 2002 in order to smooth out results and show the steady growth favored on Wall Street.