Freddie Mac says it inflated profits

Published 9:00 pm Friday, November 21, 2003

WASHINGTON — Mortgage giant Freddie Mac disclosed Friday that it had inflated its 2001 profits by nearly $1 billion, the first time in its months-long accounting crisis that it acknowledged overstating profits. The company said it may not be able to complete its accounting for 2003 until June.

The disclosures came as Freddie Mac said its overall earnings over a three-year period are being restated higher by $5 billion in a long-awaited adjustment. The underreported earnings of $4.4 billion for 2000-02 were close to what the government-sponsored company had estimated in September. In addition, Freddie Mac said that $600 million was underreported for periods prior to 2000.

Prior to Friday’s report, Freddie Mac had only acknowledged understating its earnings, giving the company a unique status among other big corporations embroiled in accounting scandals. While other companies have overstated earnings, Freddie Mac has said that executives understated its results for several years to smooth out volatility in profits and uphold its image on Wall Street as a steady performer.

"We’ve now arrived in Enron territory, and we should all be gravely concerned," said Rep. Richard Baker, R-La., a longtime critic of how Freddie Mac and its larger rival, Fannie Mae, operate. "What other surprises await us?"

Freddie Mac, based in McLean, Va., is the second-largest U.S. buyer of home mortgages, a publicly traded corporation with revenue of about $40 billion a year. It has ousted two chief executives since its accounting troubles came to light in early June, is under criminal investigation by the Justice Department, and a civil inquiry is planned by the Securities and Exchange Commission. The accounting debacle rattled Wall Street and the multitrillion-dollar home mortgage market.

Some experts, including Fannie Mae Chairman Franklin Raines, have blamed the recent rise in mortgage interest rates on market uncertainty stemming from Freddie Mac’s accounting turmoil and concern over what the government might do in response. But economists have cited several factors for the rise, including signs that the economy is gaining traction and concern about swelling federal budget deficits.

Asked Friday why the company didn’t disclose the $989 million overstatement earlier, when it made public the estimates of its underreported earnings, Freddie Mac executive Martin Baumann said, "There were many accounting corrections the company had to make."

Baumann, the executive vice president for finance and chief financial officer, told reporters in a conference call that company auditors at PricewaterhouseCoopers had just completed Thursday the massive financial reckoning — a $100 million project announced in January.

The accounting change is expected to reduce Freddie Mac’s income by an equivalent amount during the next few years and make earnings more volatile. The company warned Friday of further volatility to come, also saying that its restated results show "significantly greater" turbulence than it previously reported.

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