Freddie Mac, the nation's No. 2 mortgage finance company, replaced its top three executives this week in the wake of an accounting investigation. The company's president was accused of not fully cooperating with auditors reviewing the company's 2000-2002 financial statements.
Update 6-11-03: In spite of attempts to control damage, the mortgage giant now faces even greater scrutiny. Results of an informal probe of the company, begun by the Securities and Exchange Committee (SEC) in January, 2003, has prompted a formal investigation. Additionally, the U.S. Attorney's office in Virginia's eastern district has opened a criminal investigation, which will likely focus on Freddie Mac's recently ousted executives and its accounting practices.
Word of the shakeup sent shock waves through Wall Street as new questions arose about the company's handling of its $1.29 trillion worth of home loans.
The stock market fell sharply on the news and the yield of Treasury bonds hit a near 45-year low as investors dumped mortgage-backed securities. Stocks of Freddie Mac and the No. 1 government chartered agency, Fannie Mae, fell dramatically. Other mortgage lenders and recently hot housing stocks also fell and the dollar was weakened.
Investors spoke of fears that Freddie Mac's problems could hurt the housing market, which has been one of few areas of strength in a troubled economy since the stock market bubble burst in 2000.
"This is bad," said Paul Miller, an analyst at Friedman, Billings, Ramsey. "We've always felt that there was more here than met the eye, and it turns out that's exactly what it is."
Fired on Monday of this week was president and chief operating officer, David Glenn. In a conference call, the company disclosed that Glenn tampered with diaries he gave to counsel for the audit committee that was examining the company's books. Freddie Mac said Glenn would not receive a severance package.
The Office of Federal Housing Enterprise Oversight, which regulates the government-chartered Freddie Mac, said that more still must be done to correct "serious problems" within the company. The agency has sent a special team to investigate a second Freddie Mac audit.
"I have become increasingly concerned about evidence that has come to light of weakness in personnel expertise in accounting areas and the disclosure of misconduct on the part of Freddie Mac employees," Armando Falcon, director of the agency, said in a letter written on Saturday.
As part of the shake-up, Freddie Mac also announced that its chairman and chief executive, Leland Brendsel would retire and that its chief financial officer Vaughn Clarke had resigned.
The company's McLean, Virginia-based board, appointed Gregory Parseghian its president and CEO; Shaun O'Malley (ex-PwC Chairman) as non-executive chairman; Paul Peterson as COO and Martin Baumann as CFO.
"Job one is to get the numbers right," Parseghian said in a conference call. "We know that investor patience is wearing thin." He said that so far, no new accounting issues, fraud or criminal acts had been discovered.