Freddie Mac's Accounting Scandal
June 16, 2003
The major accounting scandals of recent years have involved mainly large private corporations like Enron and Tyco, but all that may change as Freddie Mac comes under investigation by the U.S. Securities and Exchange Commission (SEC) for possible accounting irregularities. Last week, Freddie Mac fired its president for not cooperating with an internal accounting review, and its board chairman and chief financial officer both resigned.
Fannie Mae and Freddie Mac are a pair of government-sponsored enterprises created in 1938 and 1970, respectively, to bolster homeownership. Both companies buy mortgage loans from banks and then convert them into lower-risk securities before offering them to investors. Freddie Mac is accused of deferring some of its income to make future results look more attractive to investors; the SEC will also determine whether Freddie Mac's chief executive and chief financial officer engaged in faulty accounting practices.
Fannie Mae and Freddie Mac have long received special benefits from the federal government without being held to the same level of accountability as private companies in the mortgage market:
- Each receives $2.25 billion in credit from the U.S. Treasury, giving them an implicit federal backup in case of emergency; this protection allows them to make riskier financial decisions than their private-sector competitors.
- Neither entity pays state or local income taxes and each saves an estimated $10 billion per year from this exemption.
One analyst called the two companies a textbook example of "profit-side capitalism and loss-side socialism": when they do well, they keep the profits, but if they lose money, it's taxpayer dollars that must come to the rescue.
Source: Michelle Malkin, "Martha, Move Over for Freddie," Dallas Morning News, June 12, 2003.
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