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Freddie's Profit Drops, but Share Of Market Rises

By Terence O'Hara
Washington Post Staff Writer
Friday, April 1, 2005; Page E01

Freddie Mac issued its 2004 results yesterday, bringing its financial reporting current two years after an accounting scandal caused a massive review of its finances and the ouster of top officers.

Freddie's earnings fell 41 percent in 2004, mostly because the market value of key parts of its portfolio dropped $4.48 billion. Large fees paid to accountants and consultants during the year also dragged down earnings.

Freddie Mac had more than ample reserves, as it was $3.5 billion over the amount its regulator is requiring. (William Philpott -- Reuters)

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Freddie earned $2.83 billion ($3.78 a share) in 2004, compared with $4.82 billion ($6.68) in 2003.

The results bring Freddie's financial statements up to date for the first time since 2003. Freddie should begin reporting regular quarterly results in August, when it expects to report first- and second-quarter 2005 numbers.

An overhaul of Freddie's internal controls and accounting systems will not be complete until the end of this year, chief executive Richard F. Syron told analysts on a conference call yesterday morning. But the fact that the company was able to file its annual results on time shows that progress is being made.

"We still have a lot of work to do," Syron said.

Freddie's troubles foreshadowed a much larger and more complicated accounting crisis that unfolded last year at its competitor in the mortgage business, Fannie Mae, which has only just begun fixing an internal financial system that inflated earnings by as much as $12 billion.

Measuring Freddie's business performance is difficult because of accounting rules that dictate how the company values some investments and when it recognizes income. For that reason, Wall Street analysts and the company point to "fair value," another measure of Freddie's performance. Under this method, accounting-related variations in the value of investments and liabilities from period to period are eliminated. Freddie Chief Financial Officer Martin F. Baumann said fair value is more meaningful than profit as a representation of the economic value created by the company over time.

Freddie's fair value increased $3.8 billion in 2004, compared with $4.6 billion in 2003. Using generally accepted accounting principles, profit fell dramatically in the same years, from $10.09 billion in 2003 to $2.83 billion last year. Nearly all of the drop was attributable to changes in the value of Freddie's portfolio of derivatives -- investments used to guard against changes in interest rates.

Freddie buys home mortgages directly from lenders, selling some of the mortgages to investors and holding others. It makes money off the difference between interest from the mortgages it owns and the interest on its borrowing, and it books fees for guaranteeing repayment on pools of mortgages sold to investors.

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