Freddie Mac's Duel With Regulator: Does It Report Government's Role in Its Losses?
Friday, March 27, 2009
Half a year after the government seized Freddie Mac, confusion about its role is stoking tensions between the company and its regulator, including a dispute this month over how much the mortgage giant should reveal to private investors about its financial troubles.
Federal officials who took over Freddie Mac stopped short of nationalizing the company, leaving it partly in private hands. This means Freddie still has to answer to investors and file financial disclosures.
But when Freddie Mac's executives concluded a few weeks ago that they had to disclose that the government's management of the McLean company was undermining its profitability and would cost it tens of billions of dollars, the firm's regulator urged it not to do so, according to several sources familiar with the matter.
Freddie Mac executives refused to bend. The clash grew so severe that they threatened to go to the Securities and Exchange Commission, which oversees corporate disclosures, to secure a ruling that the regulator's request was out of line. The company's regulator backed down, the sources said.
When the government seized Freddie Mac and its larger sister, District-based Fannie Mae in September, it was responding to a financial meltdown that arose in part because of their unusual, hybrid nature: private companies set up by Congress to promote the public good by supporting homeownership. That extraordinary takeover has only fueled disagreement between federal officials and company executives over the firms' status.
On the one hand, the Federal Housing Finance Agency, led by Bush administration appointee James B. Lockhart III, has full authority to direct the companies' affairs. They have been called on by the Obama administration to carry out its public policy objective of reviving the housing market by restructuring mortgages, cutting prices on home loans and taking steps to avoid foreclosure.
But the government doesn't want to nationalize the companies, which would end their pursuit of profits and the requirement that they make regulatory disclosures for the benefit of private investors.
This ambiguity over Freddie's status has at times also made it difficult for the company to reduce mortgage interest rates and to hire and hold on to top executives. The requirement that Freddie pay dividends to the government also increases its debt load, reducing the chances it can ever reemerge as a profitable company.
Now these unresolved questions about Freddie Mac's status are driving the dispute about what it should disclose as a publicly traded company listed on the New York Stock Exchange.
As Freddie Mac executives were preparing their annual 10-K financial disclosure this month, they reported that carrying out the Obama administration's housing plan would cost $30 billion this year. That sum would have to be covered by the Treasury Department. The federal government has pledged to cover $200 billion each in losses for Freddie Mac and Fannie Mae, of which the pair have asked for about $60 billion.
The housing agency asked that the cost of the program be withheld and that the firm soften language describing how government management was undercutting profitability, according to sources.
People familiar with the dispute offered different views about why the regulator sought to prevent the disclosures. One source said the regulatory officials didn't want to make it seem like government actions were causing big losses at the company and would require more taxpayer dollars. Another person said the officials thought that accounting rules would soon change, making the disclosure unnecessary.