Freddie's Finicky Finances
To their credit, government regulators at last have begun to take the roof off giant home-mortgage buyer Freddie Mac. Last week, they exposed Freddie's accounting and management problems to needed public scrutiny. As a result, the company has agreed to pay a $125 million penalty, and clean up its act.
That may help Freddie, the second-largest home-mortgage buyer in the world behind its sibling, Fannie Mae, get beyond its myriad troubles, but is it enough?
In its report, regulators at Freddie's weak oversight agency, the Office of Federal Housing Enterprise Oversight (OFHEO), came on more strongly than ever before, saying Freddie ignored accounting rules, and violated the public trust in pursuit of "steady" growth earnings - earnings that were "smoothed out" by questionable accounting practices that ultimately forced Freddie into restating those earnings last month. In fact, Freddie reported understating its net income by nearly $5 billion over more than three years.
Regulators also said that Freddie's management failed to implement adequate internal controls in an effort to keep up with Fannie Mae, and that its directors were "lulled" by the company's success and "failed to exercise adequate oversight."
While OFHEO did expose the flaws in this government-sponsored enterprise, Freddie and Fannie oversight also needs strengthening. Some analysts wonder whether Fannie may have at least some of the same problems as Freddie. Both certainly have felt the pressure to produce steady profits for shareholders, as they've grown exponentially under the security blanket of an implied government bailout should they ever fail.
OFHEO now will turn a brighter spotlight on Fannie Mae. But they're outsourcing the job, and the money to pay for it is hung up in the giant appropriations bill awaiting congressional action in January.
Freddie was caught red-handed in an accounting scandal. Let's hope Fannie isn't in for the same. A new, stronger regulator for both, one that reports to the more qualified Treasury Department, can't come soon enough.