Freddie Pressured Over Accounting Disclosure
Wednesday, May 6, 2009
When Freddie Mac privately suggested to regulators last month how it planned to account for its mounting losses, the mortgage giant set off a firestorm.
Freddie Mac's regulator pressed the company to withhold information related to the proposal from a federal filing, concerned that this seemingly arcane discussion of accounting practices could add billions of dollars to the government's cost of bailing out financial firms, two people familiar with the matter said.
But the company's executives refused, the sources said. They worried that removing the information from the report to the Securities and Exchange Commission could expose them to accusations they'd hid required details from regulators.
The dispute between the mortgage giant and the Federal Housing Finance Agency was the latest since the federal government took over McLean-based Freddie Mac and its larger sister, District-based Fannie Mae, in September, enlisting the companies in the campaign to revive the housing market and pledging to cover their losses. The transition has proven awkward for companies that are still, in part, privately owned by investors.
In the middle of this debate was David B. Kellermann, Freddie Mac's acting chief financial officer who died in an apparent suicide on April 22. Kellermann, who had spent years reworking Freddie Mac's accounting after a scandal earlier this decade, "felt pressured" to withhold information that he felt he had a duty to provide, said a person knowledgeable of his tenure at the company.
While several people familiar with Kellermann's final days said he took the clash with regulators personally, investigators have offered no indication that this contributed to his death. He left no note, law enforcement sources said, and no motivation has been disclosed.
Freddie Mac and Fannie Mae were seized last year after the Treasury Department determined that increasing losses at the firms posed a risk to the wider financial system. Together, the two companies have received nearly $60 billion from the government to shore up their health.
In March, Freddie Mac executives, including Kellermann, had tussled with FHFA over whether to disclose to investors that government management was undermining profitability and may cost the company about $30 billion, sources familiar with the dispute said. The regulator had urged Freddie not to do so, three sources said. The company threatened to appeal to the SEC and ultimately disclosed the possible cost. An FHFA official has said that it did not try to prevent the disclosure.
This potential expense was related to the Obama administration's housing recovery program, for which Freddie Mac playing a part in modifying the mortgages of homeowners facing foreclosure. Many of these loans had been bundled into securities. So to modify the mortgages, Freddie Mac has to pluck them out of the securities, which entails reassessing the value of the loans and marking them down to their current market price. The company might then have to record a charge to reflect these decreased values.
Based on Dec. 31 figures, Freddie Mac said it might have to incur "an initial pre-tax charge" of $30 billion. That loss would be covered by taxpayer dollars.
But whether to disclose this potential cost wasn't the company's only recent battle with its regulator.
Freddie Mac later concluded that it would not have to take the loss after all, two sources said. But the company wanted confirmation from the SEC that this accounting approach was correct.