Washington investors who were counting on Freddie Mac's long-awaited restatement of its earnings reports to clear the air and usher in a new era of full and frank disclosure by the giant McLean mortgage finance company got their comeuppance Friday when the restatement was issued.
Freddie is still fudging, still stalling the release of financial information that investors can get from every other company in the Washington region.
After promising the long-overdue first-quarter report would be available by now, Freddie officials now say investors will have to wait until June to find the answer -- 15 months instead of the usual six weeks after the end of the quarter.
And it will be 2005 before Freddie Mac gets its records in order so it can register with the Securities and Exchange Commission and start filing periodic financial reports -- a basic investor protection provided by every public company in town except Freddie. That will be two years behind Freddie's big sister, Fannie Mae, which voluntarily filed with the SEC in March.
While Freddie Mac officials proclaim that they are being "extremely transparent and candid" about their business, they have been lobbying behind the scenes to keep Congress from passing legislation that would make those words mean something.
Though individual investors are understandably skittish about Freddie's dismal disclosure record, Wall Street still loves Freddie. It's an incestuous relationship, inherently suspect because the big financial firms make millions of dollars a year doing various kinds of mortgage securities and bond business with the company. They were also parties to some of the deals that Freddie used to manipulate its earnings.
During a conference call with Wall Street research analysts Friday, one analyst fawned over Gregory J. Parseghian, who is being forced out of the job of chief executive because of his participation in the manipulation of Freddie's earnings. "Greg, thank you for all the great work you've done over the years," he said. "It's a shame you're not going to be CEO."
It's a shame that Wall Street doesn't have higher ethical standards.
To top it all off, after giving the impression for the past 10 months that accounting trickery was used to reduce its profits and not inflate them, Freddie disclosed that its accounting had in fact inflated profits for one year and turned one losing quarter into a winner.
Despite that, Freddie officials continue to defend the statement made by influential board member George D. Gould at a congressional hearing in September that Freddie was different from WorldCom Inc. and Enron Corp.
"In stark contrast to other recent corporate restatements, we expect Freddie Mac's restatement to show a cumulative increase in earnings for the prior years," Gould testified.
The key word turns out to be "cumulative." The net impact was to understate profits by $4.4 billion over the years 2000, 2001 and 2002. But in the first quarter of 2001, Freddie Mac's original accounting showed a profit, when now it is reporting a loss. For that entire year, Freddie Mac's earnings were inflated by about $1 billion.
What's happening at Freddie in 2003 is still unknown, because Freddie Mac officials acknowledged Friday that they are unable to calculate profits for even the first quarter, let alone the second and third.
The failure to produce a first-quarter financial report illustrates why regulation of Freddie has been such a failure.
The SEC cannot take any action against Freddie, because when Congress created the two mortgage companies, it exempted them from SEC regulation. Under SEC rules a company gets one automatic five-day extension to the deadline for filing a quarterly report, and after that has to explain itself to the stock regulators. Compliance is rarely a problem except with companies in serious financial trouble or management turmoil, SEC officials said.
The New York Stock Exchange, in theory, ought to be doing something, since that's where Freddie's stock trades. NYSE rules set "no specific time limit for publication of interim earnings statements" such as quarterly reports.
"It is expected that . . . each company will conform at least to the pattern established by the majority of companies in its industry," the NYSE rules state. "Where the company has a previous record" of scheduling the release of quarterly reports, it is expected to conform "to the pattern established by that previous record," according to rules.
Freddie Mac officials say they have discussed the issue with the exchange, which at this point seems willing to let Freddie skip its quarterly reports this year. Until next summer, when Freddie promises to deliver all this year's reports, investors will be making decisions in the dark about whether to buy or sell Freddie's stock.
As a practical matter, it's hard to imagine what the NYSE or the SEC could do to make Freddie file current financial information, even if it could.
The usual remedy for overdue reports is to suspend trading in a company's stock.
They don't dare do that to Freddie.
Freezing the stock could brutalize the individual investors, pension plans and professional traders who buy and sell between 2 million and 6 million shares of Freddie Mac every day.
Worse, it would carry the potential to cause chaos in the mortgage market, triggering a crisis in the housing industry, sending mortgage interest rates soaring and drying up financing for millions of American families.
The market for Freddie's stock is a pittance compared with the hundreds of billions of bonds, notes and other securities that are backed by Freddie's mortgages. Fannie Mae, which has even more mortgage paper outstanding, would certainly be infected by Freddie's woes. And if the market for Freddie and Fannie Mae's mortgage securities were disrupted, the ripples would rush through other financial markets like a tidal wave.
The ominous possibilities are so well recognized that Freddie and Fannie have been labeled "too big to fail." It's well understood that the government would have to step in if either got into financial trouble because the whole financial market would be at risk, and potentially the whole economy.
But another troubling development in this affair has been the lack of any real enforcement authority over Freddie -- and by extension Fannie -- by the government that created it. The Office of Federal Housing Enterprise Oversight, the tiny agency assigned to regulate Fannie and Freddie, lacks the legal tools and the political clout to clean up Freddie's accounting scandals and get the company to comply with financial disclosure rules.
There is a clear need for the reform being considered by Congress that would put the Treasury Department in charge of overseeing the government-chartered mortgage companies, but the legislation has been stalled by Freddie, Fannie and their friends in the housing industry.
Freddie Mac's ability to defy the usual standards of financial disclosure with impunity may earn Fannie and Freddie another label: Too big to nail.
Freddie is still fudging, still stalling the release of financial information that investors can get from every other company in the Washington region.
After promising the long-overdue first-quarter report would be available by now, Freddie officials now say investors will have to wait until June to find the answer -- 15 months instead of the usual six weeks after the end of the quarter.
And it will be 2005 before Freddie Mac gets its records in order so it can register with the Securities and Exchange Commission and start filing periodic financial reports -- a basic investor protection provided by every public company in town except Freddie. That will be two years behind Freddie's big sister, Fannie Mae, which voluntarily filed with the SEC in March.
While Freddie Mac officials proclaim that they are being "extremely transparent and candid" about their business, they have been lobbying behind the scenes to keep Congress from passing legislation that would make those words mean something.
Though individual investors are understandably skittish about Freddie's dismal disclosure record, Wall Street still loves Freddie. It's an incestuous relationship, inherently suspect because the big financial firms make millions of dollars a year doing various kinds of mortgage securities and bond business with the company. They were also parties to some of the deals that Freddie used to manipulate its earnings.
During a conference call with Wall Street research analysts Friday, one analyst fawned over Gregory J. Parseghian, who is being forced out of the job of chief executive because of his participation in the manipulation of Freddie's earnings. "Greg, thank you for all the great work you've done over the years," he said. "It's a shame you're not going to be CEO."
It's a shame that Wall Street doesn't have higher ethical standards.
To top it all off, after giving the impression for the past 10 months that accounting trickery was used to reduce its profits and not inflate them, Freddie disclosed that its accounting had in fact inflated profits for one year and turned one losing quarter into a winner.
Despite that, Freddie officials continue to defend the statement made by influential board member George D. Gould at a congressional hearing in September that Freddie was different from WorldCom Inc. and Enron Corp.
"In stark contrast to other recent corporate restatements, we expect Freddie Mac's restatement to show a cumulative increase in earnings for the prior years," Gould testified.
The key word turns out to be "cumulative." The net impact was to understate profits by $4.4 billion over the years 2000, 2001 and 2002. But in the first quarter of 2001, Freddie Mac's original accounting showed a profit, when now it is reporting a loss. For that entire year, Freddie Mac's earnings were inflated by about $1 billion.
What's happening at Freddie in 2003 is still unknown, because Freddie Mac officials acknowledged Friday that they are unable to calculate profits for even the first quarter, let alone the second and third.
The failure to produce a first-quarter financial report illustrates why regulation of Freddie has been such a failure.
The SEC cannot take any action against Freddie, because when Congress created the two mortgage companies, it exempted them from SEC regulation. Under SEC rules a company gets one automatic five-day extension to the deadline for filing a quarterly report, and after that has to explain itself to the stock regulators. Compliance is rarely a problem except with companies in serious financial trouble or management turmoil, SEC officials said.
The New York Stock Exchange, in theory, ought to be doing something, since that's where Freddie's stock trades. NYSE rules set "no specific time limit for publication of interim earnings statements" such as quarterly reports.
"It is expected that . . . each company will conform at least to the pattern established by the majority of companies in its industry," the NYSE rules state. "Where the company has a previous record" of scheduling the release of quarterly reports, it is expected to conform "to the pattern established by that previous record," according to rules.
Freddie Mac officials say they have discussed the issue with the exchange, which at this point seems willing to let Freddie skip its quarterly reports this year. Until next summer, when Freddie promises to deliver all this year's reports, investors will be making decisions in the dark about whether to buy or sell Freddie's stock.
As a practical matter, it's hard to imagine what the NYSE or the SEC could do to make Freddie file current financial information, even if it could.
The usual remedy for overdue reports is to suspend trading in a company's stock.
They don't dare do that to Freddie.
Freezing the stock could brutalize the individual investors, pension plans and professional traders who buy and sell between 2 million and 6 million shares of Freddie Mac every day.
Worse, it would carry the potential to cause chaos in the mortgage market, triggering a crisis in the housing industry, sending mortgage interest rates soaring and drying up financing for millions of American families.
The market for Freddie's stock is a pittance compared with the hundreds of billions of bonds, notes and other securities that are backed by Freddie's mortgages. Fannie Mae, which has even more mortgage paper outstanding, would certainly be infected by Freddie's woes. And if the market for Freddie and Fannie Mae's mortgage securities were disrupted, the ripples would rush through other financial markets like a tidal wave.
The ominous possibilities are so well recognized that Freddie and Fannie have been labeled "too big to fail." It's well understood that the government would have to step in if either got into financial trouble because the whole financial market would be at risk, and potentially the whole economy.
But another troubling development in this affair has been the lack of any real enforcement authority over Freddie -- and by extension Fannie -- by the government that created it. The Office of Federal Housing Enterprise Oversight, the tiny agency assigned to regulate Fannie and Freddie, lacks the legal tools and the political clout to clean up Freddie's accounting scandals and get the company to comply with financial disclosure rules.
There is a clear need for the reform being considered by Congress that would put the Treasury Department in charge of overseeing the government-chartered mortgage companies, but the legislation has been stalled by Freddie, Fannie and their friends in the housing industry.
Freddie Mac's ability to defy the usual standards of financial disclosure with impunity may earn Fannie and Freddie another label: Too big to nail.
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