<!doctype html public "-//W3C//DTD W3 HTML//EN"> <html><head><style type="text/css"></style><title>Freddie Mac</title></head><body> <div><font face="Lucida Grande" size="-3" color="#000000">This sounds potentially ominous, what's going one here?</font></div> <div><font face="Lucida Grande" size="-3" color="#000000"><br></font></div> <div><font face="Lucida Grande" size="-3" color="#000000" >http://www.nytimes.com/2003/06/12/business/12MAC.html?th</font></div> <div><font face="Lucida Grande" size="-3" color="#000000"><br></font></div> <div><font face="Lucida Grande" size="-3" color="#000000">Accounting at Mortgage Concern Is Under Investigation<br> By ALEX BERENSON</font><br> <font face="Lucida Grande" size="-3" color="#000000"></font></div> <div><font face="Lucida Grande" size="-3" color="#000000">Federal prosecutors said yesterday that they had begun a criminal investigation into Freddie Mac, the second-largest financier of home mortgages, after the company fired its president for failing to cooperate with an internal investigation into its accounting. The company also disclosed that the Securities and Exchange Commission had opened a formal investigation into it.</font></div> <div><font face="Lucida Grande" size="-3" color="#000000"><br></font></div> <div><font face="Lucida Grande" size="-3" color="#000000">Freddie Mac pledged to cooperate with the government investigations.<br> <br> Freddie Mac also said that Leland C. Brendsel, who stepped down as chairman and chief executive, received stock options and shares worth $21.1 million as a result of his resignation. Mr. Brendsel's severance also includes $3.2 million in salary and bonus payments over the next two years and health care and life insurance benefits for the next five years, the company said.<br> Advertisement<br> <br> David W. Glenn, who was fired on Friday as president and chief operating officer, will not receive any future salary or bonus, the company said. Mr. Glenn also did not receive any options or shares, although he will be allowed to keep options worth $5.3 million and a payment of $826,000 related to those options, the company said.<br> <br> The company did not disclose the compensation it paid Vaughn A. Clarke, who resigned as chief financial officer.<br> <br> David R. Palombi, a Freddie Mac spokesman, said the company had decided not to disclose Mr. Clarke's severance pay because he was not among its five highest-paid employees, and companies are required to disclose the compensation of only those five.<br> <br> In the statement about the severance packages, the company also disclosed that the board fired Mr. Glenn and asked for Mr. Brendsel's resignation on Friday. The company did not publicly announce the management shake-up until Monday morning, and it said at the time that Mr. Brendsel had retired, not resigned.<br> <br> Mr. Palombi said that the company had delayed the announcement because the board did not ratify its decision until Sunday.<br> <br> Freddie Mac has said that it fired Mr. Glenn because he failed to cooperate with an internal investigation that began in January into the company's accounting practices in 2001 and 2002. A week ago, Mr. Glenn told the special counsel leading the investigation that he had altered and removed pages from a notebook that contained handwritten observations he made at company meetings.<br> <br> Freddie Mac said on Monday and repeated yesterday that the alterations were unrelated to its accounting records.<br> <br> Thomas P. Vartanian, a lawyer for Mr. Glenn, declined to comment.<br> <br> Freddie Mac has also repeatedly said that its business is strong and that its internal investigation is examining whether it recognized profits in the right time period, not whether it inflated profits. The Office of Federal Housing Oversight, the chief federal regulator of Freddie Mac, has said that the company's fundamentals are sound and that its debt is safe.<br> <br> So far, investors seem to agree. While Freddie Mac's stock is down more than 16 percent since Friday, its bonds have lost only a faction of their value. Yesterday, shares of Freddie Mac fell $1.50, or nearly 3 percent, to $50.<br> <br> But the new investigations add to the pressure on Freddie Mac to disclose more information quickly about its accounting issues and the notes that Mr. Glenn is said to have altered. Freddie Mac and its larger cousin, Fannie Mae, are pivotal players in both the housing and bond markets. Freddie Mac alone holds $600 billion in mortgages. So serious problems at Freddie Mac could reverberate throughout the economy, analysts say.<br> <br> The S.E.C. had already been monitoring the company's internal inquiry informally, but its decision to open a formal investigation gives it the power to subpoena witnesses and documents either from Freddie Mac or third parties.</font></div> <div><font face="Lucida Grande" size="-3" color="#000000"><br> "We will continue to cooperate in all respects as the investigation continues," Shaun F. O'Malley, Freddie Mac's new chairman, said in a statement.<br> <br> In addition, the United States attorney's office in Alexandria, Va., whose district includes Freddie Mac's headquarters, confirmed that it had opened an investigation into the company. The investigation was reported yesterday by The Washington Post.<br> <br> Mr. Palombi, the Freddie Mac spokesman, said that Freddie Mac had contacted prosecutors yesterday afternoon to pledge its cooperation with their investigation.<br> <br> While not well known outside Wall Street, Freddie Mac is one of the world's largest financial institutions. It is a government-sponsored but investor-owned company that insures mortgages against default, enabling them to be sold to investors as bonds called mortgage-backed securities.<br> <br> Fannie Mae, once known as the Federal National Mortgage Association, and Freddie Mac, formerly the Federal Home Loan Mortgage Corporation, also issue their own bonds, using the money they raise to hold mortgages on their books.<br> <br> Freddie Mac's investigation into its accounting began in January after its auditor, PricewaterhouseCoopers - which took over for Arthur Andersen last year - raised questions about whether the company had properly accounted for its portfolio of derivatives. Changes in interest rates drastically affect the value of mortgages.<br> <br> Fannie Mae and Freddie Mac both try to reduce that risk by using derivatives, like interest rate swaps in which two parties agree to a contract whose outcome is based on the relationship between long-term and short-term rates.<br> <br> But PricewaterhouseCoopers said that the company appeared to have improperly accounted for some of the derivatives in its portfolio.<br> <br> When it disclosed the investigation, Freddie Mac said that if it had used the correct accounting techniques, it would have reported higher earnings in 2001 and 2002. But the company denied that it deliberately tried to lower its earnings in those years to create a reserve of earnings for future years.</font></div> </body> </html>