U.S. Attorney, SEC Probe Freddie Mac
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By Mark Felsenthal
WASHINGTON (Reuters) - Federal prosecutors on Wednesday revealed a criminal probe into Freddie Mac, two days after the No. 2 U.S. mortgage finance company cleared out its senior management over accounting irregularities.
In addition, Freddie Mac confirmed the Securities and Exchange Commission (news - web sites) has begun a formal investigation and said the SEC has been carrying out an informal probe since January.
But the news was tempered by evidence of undimmed market appetite for the company's debt as Freddie Mac pressed ahead successfully with a $1 billion bond sale on Wednesday.
Federal Reserve (news - web sites) Governor Susan Bies also downplayed the risk of short-term economic fallout from the company's woes.
"Obviously Freddie stock got hit but the securities which would affect home buyers seem to still be very liquid and we know the housing market is still very strong," Bies said at a banking conference.
Earlier, Freddie Mac said it would buy back as much as $10 billion of debt, triple its prior record buyback.
"The initial news (of the investigation) spooked some people and spreads widened out, but I don't see a lot of panic in the street," said Steve Mahoney, portfolio manager at Glenmede Trust in Philadelphia.
Moody's Investors Service and Fitch Ratings said the news does not change their view of Freddie Mac. They and Standard & Poor's affirmed their highest credit ratings on its senior debt, which has the most bearing on its borrowing cost.
INVESTOR LAWSUIT
Meanwhile, a New York law firm initiated a class action lawsuit against Freddie Mac on behalf of investors, saying they bought the company's securities during a time when statements by the company allegedly inflated prices. Lawyers Weiss & Yourman filed the lawsuit in the U.S. District Court for the Southern District of New York, they said in a statement.
Freddie Mac officials could not immediately be reached for comment on the legal action.
Housing has been a rare bright spot in a bleak economy as record-low mortgage rates drew buyers and spurred consumer spending through a mortgage refinancing boom.
"I haven't seen any sign that there will be a short-run impact and we'll just have to wait and see what happens long-term," Bies said, adding it was not the Fed's job to investigate Freddie Mac but that it would watch the process.
Freddie Mac, which owned or had guaranteed $1.27 trillion in home loans at the end of the third quarter 2002, on Monday fired President and Chief Operating Officer David Glenn for failing to fully comply with a review of earnings statements back to 2000. The company said he altered diaries he provided to an audit committee.
The company has said it expects the restatement to revise earnings higher.
Chairman and Chief Executive Leland Brendsel and Chief Financial Officer Vaughn Clarke have stepped down. Glenn's attorney declined comment on Wednesday while efforts to reach Brendsel and Clarke were unsuccessful.
Brendsel, under his contract terms, can cash in up to $21.1 million in stock grants and will get the equivalent of two years' salary, $2.36 million, Freddie Mac said. Glenn, in contrast, will receive no new compensation after his firing and must forfeit stock grants worth $11.2 million, it added.
CONGRESSIONAL HEARINGS
The U.S. Attorney's office in Virginia's eastern district said it had launched a probe but federal prosecutor Paul McNulty gave no details about the investigation's focus, extent or timing. A government source said the prosecutor launched the investigation before the management shake up.
Freddie Mac said it has not received any notice from the Attorney's office but that it would cooperate wholly with any such investigation.
Shaun O'Malley, the firm's newly installed chairman, said in a statement the company will also cooperate with the SEC.
The company's federal financial regulator, the Office of Federal Housing Enterprise (news - web sites) Oversight -- which may face questions from lawmakers for not revealing the problems earlier -- has launched its own inquiry in Freddie Mac's restatement.
"We need to understand why the misrepresentation in the diary led to the dismissal of the entire management team," said Rep. Richard Baker, a Louisiana Republican and persistent critic of Freddie Mac and sibling Fannie Mae .
Sen. Richard Shelby, the Alabama Republican who chairs the Senate's banking panel, said he will hold hearings on Freddie Mac's accounting troubles and investigator findings.
McLean, Virginia-based Freddie Mac is shareholder-owned but congressionally chartered to help fund the mortgage market by buying home loans from lenders and repackaging them into securities that it sells to investors.
Freddie Mac and Fannie Mae are called government-sponsored enterprises because of government benefits, including largely symbolic multibillion dollar credit lines, that help them borrow at lower interest rates than other companies.
Freddie Mac's shares ended down $1.50 at $50. The stock has fallen more than 15 percent this week and shed nearly $7 billion in market capitalization since the June 6 close. (Reporting by Mark Felsenthal, additional reporting by Deborah Charles, Andrea Hopkins and Susan Cornwell in Washington and Jonathan Stempel, Richard Leong, Lynn Adler and Bill Rigby in New York) |
