Subject:  Three Top Executives at Freddie Mac Are Out |
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Date Posted: 16:46:31 06/09/03 Mon
Three Top Executives at Freddie Mac Are Out
By KENNETH N. GILPIN
reddie Mac, one of the giants of the home mortgage market, rattled financial markets today when it announced that its three top executives had either been dismissed or were stepping down over questions relating to the company's accounting practices.
In a surprise shake-up, Freddie Mac said it had fired its president and chief operating officer, David Glenn. In addition, the chairman and chief executive, Leland Brendsel, and Vaughn Clarke, the chief financial officer, resigned.
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In a statement, Freddie Mac said it had dismissed Mr. Glenn "because of serious questions as to the timeliness and completeness of his cooperation and candor" with Freddie Mac's audit counsel relating to a continuing restatement of the company's financial results for 2000 through 2002.
Freddie Mac announced in January that it would restate its earnings on the advice of PricewaterhouseCoopers, the accounting firm it hired to replace Arthur Andersen, which was dissolved in the wake of the Enron scandal.
When it said it would restate its earnings, Freddie Mac initially said the review process would be completed in May. That timetable has been extended. This morning, the company said it would probably be completed at some point in the third quarter.
Separately, the Office of Federal Housing Enterprise Oversight, the regulator that oversees Freddie Mac and its counterpart in the home mortgage market, Fannie Mae, said it was undertaking its own review of "all aspects" of the issues surrounding the re-audit.
In a scathing letter to Freddie Mac's board dated June 7, Armando Falcon Jr., the oversight office's director, said, "Removal of members of the management team only goes a part of the way toward correcting serious problems — concerns surrounding management practices and controls remain."
To replace the ousted executives, Freddie Mac said its board had chosen Gregory J. Parseghian, 42, to be chief executive and president, and Paul T. Peterson, 53, to be chief operating officer. Martin F. Bauman, 55, was named chief financial officer.
Previously, all three had served terms as executive vice president at Freddie Mac.
"These are all internal guys, and are straight-up people," Mr. Miller said. "The board is doing this to try and build confidence as fast as possible."
During a morning conference call with securities analysts and shareholders, Mr. Parseghian said the company did not believe that fraud or criminal misconduct were involved in the reaudit process.
In a telephone interview, Mr. Parseghian, who is no relation to Ara Parseghian, the famed college football coach, said the management changes had been made because the "board was very upset about the condition of our controls that led to the accounting errors and the need for a reaudit and a restatement." He added, "They are holding management accountable for that."
Mr. Parseghian, who before moving to Freddie Mac in 1996 had an extensive career on Wall Street, including stints as a managing director at Salomon Brothers and at what was then the First Boston Corporation, said he had a number of goals and objectives in his new post.
"Job one is to put out accurate financial statements," he said. "Beyond that, our goal is to continue to earn outstanding returns on shareholder capital, and to perform our housing mission, which is allow more Americans to get mortgage financing because of the existence of Freddie Mac, and to get it at lower cost."
The proximate source of concern appeared to center on a personal diary that Mr. Glenn maintained and provided to the special independent counsel hired by the audit committee.
The diary, which was turned over last week, was discovered to have pages that had been altered or torn out.
During the conference call, "Greg Parseghian said there was nothing that came out of the diary that revealed any more problems," said Bruce Harting, an analyst at Lehman Brothers.
Nevertheless, Mr. Harting continued, "in this corporate governance environment we are in right now, the news this morning created fear that the reaudit results will be worse than people are expecting."
Investors reacted in just this fashion.
By early afternoon, Freddie Mac's stock was down $9.69 a share, to $50.15.
"We don't have any visibility on earnings right now, and are telling investors to be somewhat careful going into the restatement," said Paul J. Miller, an analyst at Friedman, Billings, Ramsey in Alexandria, Virginia. "We think this is still a long-term growth vehicle, but it could be noisy for the next couple of months."
The analysts said the need to restate Freddie Mac's financial statements comes from a different interpretation of an accounting rule issued by the Financial Accounting Standards Board in 1999 which went into effect a year later.
The rule, F.A.S. 133, relates to how financial companies classify and account for various securities. It is a highly complicated rule, one that has befuddled many.
"I haven't met a single chief financial officer who thinks F.A.S. 133 is easy to interpret," Mr. Harting said.
Arthur Andersen, Freddie Mac's auditor when F.A.S. 133 became effective, was of the opinion that Treasury securities on Freddie's books qualified as derivatives.
PricewaterhouseCoopers took a different view, saying the securities had to be classified as cash securities, which need to be marked to market each quarter.
"By classifying these things as derivatives, they were offsetting losses on other hedges with those gains," Mr. Harting said. "PricewaterhouseCoopers came in and said you have to let those gains go to the bottom line. To me, this is a geography of income issue, not an erosion of earnings or a change in the business model. The company will still earn the same amount. It's just that some of it will be moved."
Along with Fannie Mae, Freddie Mac was created by Congress to buy home loans from banks and other lenders to supply ready cash. They buy mortgages from lenders to keep in their portfolios and package others into securities for sale on Wall Street.
http://www.nytimes.com/2003/06/09/business/09CND-FRED.html?ex=1055822400&en=520336fa4f4f7da0&ei=5053&partner=NYTHEADLINES_HP
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