FREDDIE MAC'S ACCOUNTING SCANDAL
In
1968, the U.S. Congress chartered Fannie Mae to be a government-sponsored
enterprise (GSE). Then, another company
which named Freddie Mac was also chartered by the U.S. Congress in 1970.
Freddie Mac was established by having missions of giving more chances or
home ownership and bearable rental price as well as to pacify the country's
mortgage markets. The company's set up by having a board that consist of 18
members. The shareholders of the company had selected 13 members while the
remaining five members were appointed by the President of the United States.
Government-Sponsored Enterprise (GSE) is a company that having
special privileges that other businesses may do not have. This is because, the
company that under GSE has a direct relationship with the government. For
instance, Freddie Mac not need to pay state and local taxes in United State.
On top of that, one of the largest purchasers of home mortgages in
US is Freddie Mac. They become a secondary market to link with mortgage lenders
and investors. The Freddie Mac company works like this, it will purchase
home mortgage from mortgages leader. One of the examples of mortgage leaders is
commercial bank.
Then, they will repackaging them and sell to other people.
Furthermore, the distinction between cost of buying mortgage from bank and the
price sell to other people is the way how they make profit. We can take the
example of, if Freddie Mac buy a home mortgage from bank by$ 10 million, then
resell them to people for $15 million, they can get$ 5 million as profit in
this case.
After that, the bank have money to issue more home mortgage .As a
result, it can boost the capital in home loan market.
How was scandal happened ?
An accounting scandal
erupted at the government-sponsored company, Freddie Mac in June 2003 when it
disclosed that it had misstated earnings by almost $5 billion. They mostly under-reported for the year 2000 to 2002 to smoother quarterly volatility in
earnings and meet Wall Street expectations. Fannie and Freddie were created by
Congress to make mortgages more affordable and buy blocks of home loans from
lenders and bundle them into securities for sale to those investors from
worldwide.
On 9 June 2003,
without providing any new information about the nature of the accounting
issues, Freddie Mac company's top executives Glenn, Clarke and chairman and
chief executive Leland Brendsel were expelled from the company. The action
shocked Wall Street that the nation of second-largest buyer and guarantor of
home mortgages, Freddie Mac had a reputation as a steady performer and reliable
corporate player. It also raised the specter of an Enron-like financial
scandal, and Freddie’s stock price plunged by nearly 20%.
A subsequent report
stated that Freddie Mac’s board of directors found that accounting controls had
been weaken and certain accounting decisions as well as market transactions had
been implemented to reduce volatility in reported earnings. Mortgage finance
company which is Freddie Mac FRE revealed that it had understated earnings
almost $5 billion by paying $50 million to settle federal charges that it
misstated earnings against the law over a four-year period.
The Securities and Exchange Commission (SEC) announced
the settlement that Freddie Mac neither admitted nor denied wrongdoing in the protocol
but he agreed to avoid from future violations of the
securities laws. On 21 August 2003, the Office of Federal Housing Enterprise
Oversight (OFHEO) recommended that Freddie Mac’s replacement CEO be fired as he
involved in the accounting problems. Greg Parseghian was removed and replaced
in December 2003 by Richard F. Syron.
Freddie paid $125
million civil fine in the year 2003 through the settlement with the OFHEO which
blamed the management misconduct for the inaccurate accounting. There were some
former Freddie Mac executives: former President and Chief Operating Officer,
David Glenn, ex-chief financial officer, Vaughn Clarke, former senior vice presidents,
Robert Dean and Nazir Dossani that agreed to pay $515,000 in civil fines to
settle the SEC's negligent conduct charges and make compensation which was a
total of $275,548.
The SEC said that the $50 million from Freddie Mac will be
distributed to those shareholders injured by the alleged accounting fraud. The
settlement with the company was subjected to court approval.
Title: FANNIE and FREDDIE MAC accounting scandal
Good sharing. I feel so sorry to those shareholder who injured because alleged acc fraud.
ReplyDeleteGood sharing. I feel so sorry to those shareholder who injured because alleged acc fraud.
ReplyDeleteWow found this really interesting thank you
ReplyDelete