Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Freddie Smack

The lack of fiscal control at Freddie Mac (NYSE: FRE  ) is not reassuring. The company disclosed this morning that its understatement of profits, earlier pegged to be no higher than $4.5 billion, came in at just over $5 billion for the years 2000-2002. The big surprise, though, is that it actually overstated its earnings in 2001 by $989 million. Overall, however, the company's results were understated .

Many investors are unclear as to why any company would understate its earnings. It's quite simple, really, and firms as diverse as Microsoft (Nasdaq: MSFT  ) and General Electric (NYSE: GE  ) have been criticized for using various legal, but distasteful "cookie jar" methods to save earnings for a rainy day. Stocks are generally awarded higher multiples if their earnings are thought to be steady and recurrent. By delaying or understating earnings in a period that has gone exceedingly well, the company smooths out its results, and can retain some of those unclaimed earnings at a later date should they need to generate slightly higher results than they achieve organically.

So for a company nicknamed "Steady Freddie," the steadiness is part of the game -- it's part of what makes Freddie Mac an attractive investment. Wall Street demands it and Freddie supplies it using shady accounting, doctored diaries, and fancy swaps, asset "parking," and other tools devised by ... yup, Wall Street. I think I'm going to be sick.

A report that was released in conjunction with the restatements shows how several Wall Street banks, including CSFB (NYSE: CSR  ) and Goldman Sachs (NYSE: GS  ) , assisted with Freddie's convoluted derivative transactions to help the company groom its earnings.

The report by Baker & Botts law firm showed how Goldman, for example, partnered with Freddie Mac in some linked swap transactions to move more than $400 million of earnings from 2001 into later years. These swaps were approved by David Parseghian at Freddie, who briefly assumed the CEO's mantle at the company until regulators figured out that he was in the deception up to his eyeballs and demanded his ouster.

Freddie Mac says that it will be able to provide its 2003 restated financials by June. Problems solved, right? I'm unconvinced. Recently Freddie and Fannie Mae (NYSE: FNM  ) were able to avoid greater oversight by federal regulators into their activities. Critics have charged in recent years that the two companies have taken on substantially more risk in order to continue their rates of growth as the housing markets have matured. Given that all of the above -- all of it -- was done for the sake of keeping Freddie Mac's stock price as high as possible and generating big bonuses for corporate executives, I'd suggest that the circumstances that made such financial malfeasance both possible and attractive need to be addressed, and badly.

Find a new discount broker in 60 seconds or less -- only on

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 500210, ~/Articles/ArticleHandler.aspx, 10/28/2016 2:45:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 5 hours ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/16/2011 7:59 AM
CSR.DL2 $0.00 Down +0.00 +0.00%
China Security & S… CAPS Rating: ***
FMCC $1.60 Down -0.04 -2.44%
Freddie Mac CAPS Rating: ***
FNMA $1.69 Down -0.03 -1.74%
Fannie Mae CAPS Rating: ***
GE $28.63 Down -0.24 -0.83%
General Electric CAPS Rating: ****
GS $177.75 Up +0.68 +0.38%
Goldman Sachs CAPS Rating: ***
MSFT $60.10 Down -0.53 -0.87%
Microsoft CAPS Rating: ****