Freddie Mac Reports $2.5 Billion Loss

"This is a very ugly situation we're in," said Freddie Mac chief executive Richard F. Syron. The company is assuming that home prices have fallen only a third as far as they eventually will. (By Stephan Savoia -- Associated Press)
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By David S. Hilzenrath
Washington Post Staff Writer
Friday, February 29, 2008

Freddie Mac said yesterday it lost $2.5 billion in the fourth quarter and separately disclosed that its board has formed a special committee to investigate allegations of mismanagement by the company's directors, senior officers and outside auditors.

The McLean-based mortgage funding company said the board received two letters "from purported shareholders" late last year demanding that it take legal action to recover damages from the responsible parties.

"The formation of a special committee to look into a derivative demand letter from a purported shareholder is actually a pro forma action on the part of a corporation to determine whether or not there is any validity to an allegation," spokeswoman Sharon J. McHale said in an e-mail.

The disclosure was contained in a 190-page report the government-chartered company released as it returned to timely financial reporting five years after an accounting scandal exposed pervasive problems in the systems it uses to track its results. Freddie Mac said it is still assessing the effectiveness of certain internal controls.

The $2.5 billion loss ($3.97 a share) for the last three months of 2007 compares with a loss of $401 million (73 cents) in the fourth quarter of 2006. For all of 2007, Freddie Mac lost $3.1 billion ($5.37 per share), compared with a profit of $2.3 billion ($3) in 2006.

Changes in accounting methods improved Freddie Mac's bottom line for 2007 by $2.1 billion, according to the annual report.

Like its larger competitor, Fannie Mae, which reported a fourth-quarter loss of $3.6 billion Wednesday, Freddie Mac is widely thought to represent the most stable segment of the nation's housing market. With worse-than-expected results this week, both companies underscored the severity of the market's problems.

"After many years of effort, we are finally delivering timely financial reports," Freddie Mac chief executive Richard F. Syron said in a conference call with investors. "Unfortunately, the financials we're delivering are far from pretty."

"This is a very ugly situation we're in," and Freddie Mac is assuming that home prices have fallen only a third as far as they are going to, Syron added.

Syron declined to comment in detail on a pending probe of suspected inflation in home appraisals, which determine the value of the collateral for the loans Freddie Mac buys. However, Syron said he believes there was an increase in the volume of loans Freddie Mac has asked sellers to repurchase from the company based on flawed appraisals.

Saying it wanted to give investors a clearer view of the company's performance, Freddie Mac yesterday outlined an alternative financial measure -- adjusted operating income -- alongside the standard numbers prescribed by accounting rules.

Analyst Bradley Ball of Citigroup expressed skepticism about the new financial measure during the conference call.

"Just at a glance, it looks like you're essentially eliminating . . . all the stuff that's bad and keeping all the stuff that's good," Ball said.

Freddie's chief financial officer, Anthony "Buddy" Piszel, said Freddie Mac committed to making the change in 2006 and was not trying to make its results look better.

Freddie Mac's current leadership was brought in to clean up the company after the accounting scandal of 2003. Freddie Mac did not identify the shareholders who wrote to the board with the new allegations of "improper conduct" or the members of the special committee formed to investigate.

The company said the letters alleged "corporate mismanagement and breaches of fiduciary duty in connection with the company's risk management." One of the letters demands that the board "implement corporate governance initiatives to ensure that the alleged problems do not recur."

Freddie Mac's annual report did not elaborate on the allegations. A spokesman for PricewaterhouseCoopers, the company's auditor, also declined to comment.

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