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To: Jim Willie CB who wrote (3738)	11/21/2003 1:57:57 PM
From: Ruffian	Respond to of 108742

Freddie Mac: How We Hid $5 Billion Friday November 21, 1:39 pm ET By Mark Felsenthal WASHINGTON (Reuters) - Freddie Mac (NYSE:FRE - News) on Friday for the first time revealed details of its earnings manipulations in recent years, including billions of dollars of overstatements and understatements. The long-awaited numbers from the accounting scandal included an admission that the No. 2 mortgage finance company overstated earnings by almost $1 billion in 2001 and understated profit for 2002, 2000 and earlier periods by more than $6 billion. Freddie Mac shares rose as much as 4 percent initially as investors found some closure to the scandal, in which financial results were massaged to show the steady growth favored on Wall Street. Two of the big three rating agencies affirmed their ratings on Freddie Mac debt. However, the company said quarterly and full-year results for 2003 would be delayed until next June. "We still have to wait six months for the 2003 quarter statements. It's not a complete story," said Hilary Hayes of Victory Capital Management in New York. Freddie Mac still faces investigations by regulators and law enforcement officials, and likely tougher government supervision. Including periods before 2000, the cumulative effect of the financial finagling and accounting errors was an understatement of earnings by $5 billion, the company said. GOAL TO HAVE NEW CEO BY END-YEAR Senior company executives, in a conference call, said a new chief executive would be named by year-end. They also said they expect a board reshuffling within 18 months. Shaun O'Malley, chairman of the board of directors, told analysts the company was making sweeping changes to its financial reporting and management functions. The company's federal regulator, the Office of Federal Housing Enterprise Oversight, said in a statement, "More remains to be done by Freddie Mac, including completion of the 2003 quarterly financial statements and timely quarterly disclosures going forward." The regulator itself is under fire for not acting sooner to address the turmoil at the company. Freddie Mac stunned investors in January when it announced that earnings would have to be restated, and again in June when it ousted its chief executive and other officers for allowing the accounting irregularities. An independent report said the company's chief operating officer, David Glenn, had altered pages in his diary before turning it over to investigators. Glenn, who was fired, has agreed to pay a $125,000 civil penalty and to cooperate with a government investigation. Freddie Mac said that in addition to an earnings overstatement of $989 million in 2001, it understated profit by $4.33 billion in 2002, by $1.12 billion in 2000, and by $600 million in periods before 2000. Company officials have acknowledged that earnings were deliberately altered, but they also say honest mistakes were made in following new accounting rules for derivatives. Despite accounting and corporate governance problems, the company is profitable and solid, Chief Financial Officer Martin Baum said. "The restatement did not affect the fundamental strength of Freddie Mac's balance sheet," he said. Fitch Ratings (News) agency reaffirmed its debt ratings for Freddie Mac, and Moody's Investors Service (News - Websites) repeated its view that the restatement would not have "rating implications" for the company. The ouster of top executives in June and the company's delay in giving details of the accounting problems launched a push for tighter regulation of Freddie Mac and its larger sibling, Fannie Mae (NYSE:FNM - News). While shareholder-owned, Freddie Mac and Fannie Mae are chartered by Congress to help expand U.S. homeownership. The companies do not lend directly to home buyers but buy mortgages from lenders and repackage them as securities or hold them in their portfolios. The two companies, which together carry $1.6 trillion in assets on their balance sheets and have outstanding debt of $1.5 trillion, are not explicitly backed by the U.S. Treasury, but many investors believe the government would have to step in and prop them up in a financial crisis. Freddie Mac shares were up 80 cents at $56.44 in midday trade on the New York Stock Exchange (News - Websites) after rising as high as $57.90 earlier in the session. Fannie Mae shares were up 6 cents to $69.60. (Additional reporting by Richard Leong and Lynn Adler in New York)