Cost to Fix Freddie Mac Accounting Problems: $376 Million

Freddie Mac executives told analysts Wednesday that it spent about $376 million last year to fix accounting errors that led to the ouster of three top executives and a massive financial restatement.

Chief Financial Officer Martin Baumann said Freddie Mac spent $172 million last year just on its earnings restatement, which resulted in a $5.1 billion cumulative, net increase to earnings from 2000 through 2002, the Wall Street Journal reported

"That was just digging down, finding the accounting errors, fixing them, restating the results," Baumann said. Freddie Mac, the second largest U.S. mortgage buyer, spent an additional $79 million on new software in 2003. Upgrading the technology infrastructure has cost $80 million so far this year. Baumann predicted: "That number will at least double or more through the end of the year."

Freddie Mac’s new Chairman and Chief Executive Richard Syron told investors, "We have a lot of costs now that I think are a bubble, that go through dealing with a lot of the problems that I think are the result of under-investing in the past. The way you should think of this is a corporation that had some difficulties and is essentially going through a restructuring."

Observers say Freddie Mac is moving closer to fixing its accounting.

"They are seriously trying to bring it up to speed but it won't happen overnight," James McGlynn, a fund manager at Summit Investment Partners in Cincinnati, told Bloomberg. "I don't think Syron is trying to hide any facts and as long as the business holds up people should be content."

The company expects high costs to remain through 2005 in administration, technology and legal and regulatory matters.

Meanwhile, Bloomberg reported that Freddie Mac said Wednesday that its net income fell 52 percent in 2003. The decline came as rising interest rates in the second half of 2003 reduced the gains on contracts used to protect the value of its mortgage assets, said Michael Cosgrove, a Freddie Mac spokesman.

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