Tuesday, November 08, 2005
Why Freddie Can't Count
The accounting-challenged Federal Home Loan Mortgage Corporation – aka Freddie Mac – reported today that it is restating downward its first-half 2005 earnings by $220 million due to:
Yes, that's right, folks. Freddie Mac, the mortgage behemoth, can't calculate accrued interest. (Does anyone else smell an Excel spreadsheet lurking in the wings?)
And this was no little "forgot-to-carry-the-one," representing over 15% of Freddie's first-half earnings.
Moreover, it's simply an astounding error for a company that has been dealing in home mortgages since 1970, that provides mortgages for over three million home buyers a year, that holds a mortgage portfolio of $1.5 trillion (according to its latest annual report), that has a board of directors chock full of bankers, accountants and financial geniuses, and that "aspires to be the premier financial institution in the world."
It's even more astounding still when one remembers that Freddie has been actively working to get its accounting house in order since 2003.
In Freddie's press release, CFO Martin Baumann writes:
The press release goes on to state that:
2006?! Freddie Mac hasn't produced a timely, accurate financial report for five years running. It's regulators (nevermind investors) can only guess at its financial condition. Why should 2006 be any different?
One is tempted to write Freddie off as just one more clown in the accounting hit parade that can't count the beans. The reasons are all too familiar: executive greed, director biases, accounting-firm negligence, and regulatory impotence. However, as a huge, government-sponsored enterprise (GSE), if push came to shove, Freddie would in all likelihood be bailed out using taxpayer money. Freddie Mac must therefore maintain at least as high a standard as private financial institutions. Instead, Freddie and its sister institution, Fannie Mae, have demonstrated that they are incapable of upholding even generally accepted accounting principles. Which begs the question: are they worth the trouble?
(Coincidentally, Freddie's senior vice president, corporate
controller and principal accounting officer resigned October 28 to go to Washington Mutual as its controller. Stay tuned.)
–GAHjr
"an error in a legacy computer system used to compute interest on certain mortgage-related securities (primarily non-agency securities) that accrue interest on other than a calendar-month basis."
Yes, that's right, folks. Freddie Mac, the mortgage behemoth, can't calculate accrued interest. (Does anyone else smell an Excel spreadsheet lurking in the wings?)
And this was no little "forgot-to-carry-the-one," representing over 15% of Freddie's first-half earnings.
Moreover, it's simply an astounding error for a company that has been dealing in home mortgages since 1970, that provides mortgages for over three million home buyers a year, that holds a mortgage portfolio of $1.5 trillion (according to its latest annual report), that has a board of directors chock full of bankers, accountants and financial geniuses, and that "aspires to be the premier financial institution in the world."
It's even more astounding still when one remembers that Freddie has been actively working to get its accounting house in order since 2003.
In Freddie's press release, CFO Martin Baumann writes:
"We've made enormous strides in fixing our financial infrastructure but, as we have previously disclosed, the effort is not yet complete. When we found this error, we corrected it immediately. [Good to know!] We are continuing to move forward to complete the job of producing timely, accurate financial reports early in 2006."
The press release goes on to state that:
"The company also expects to release fourth quarter and full-year 2005 results and to begin filing timely, GAAP-compliant monthly capital reports with its regulator, the Office of Federal Housing Enterprise Oversight, no later than the end of March 2006."
2006?! Freddie Mac hasn't produced a timely, accurate financial report for five years running. It's regulators (nevermind investors) can only guess at its financial condition. Why should 2006 be any different?
One is tempted to write Freddie off as just one more clown in the accounting hit parade that can't count the beans. The reasons are all too familiar: executive greed, director biases, accounting-firm negligence, and regulatory impotence. However, as a huge, government-sponsored enterprise (GSE), if push came to shove, Freddie would in all likelihood be bailed out using taxpayer money. Freddie Mac must therefore maintain at least as high a standard as private financial institutions. Instead, Freddie and its sister institution, Fannie Mae, have demonstrated that they are incapable of upholding even generally accepted accounting principles. Which begs the question: are they worth the trouble?
(Coincidentally, Freddie's senior vice president, corporate
controller and principal accounting officer resigned October 28 to go to Washington Mutual as its controller. Stay tuned.)
–GAHjr
