VideoAmid mounting probes of alleged accounting misdeeds and document tampering at Freddie Mac, the federal home loan packager's board has sacked its president and switched CFOs.
The former president and chief operating officer, David Glenn, "was terminated because of serious questions as to the timeliness and completeness of his cooperation and candor with the Board's Audit Committee counsel," the company's directors noted in a press release.
The Freddie Mac board had hired its audit committee counsel in January to figure out why accounting errors had cropped up during the process of a restatement of financial results for 2000, 2001, and 2002. In January the company announced that some applications of its accounting policies, including those involving derivatives and mortgage assets, were out of line with generally accepted accounting principles (GAAP).
The restatements will likely boost the company's reported earnings for prior periods and its capital surplus as of year-end 2002, according to a Freddie Mac statement. Company representatives have reportedly denied that the accounting errors were made in an attempt to smooth earnings when the white-hot real-estate market cools down.
As part of a flurry of management changes, former chief investment officer Gregory Parseghian was named chief executive officer and president, and Martin Baumann, an executive vice president, was picked as CFO. Baumann replaces Vaughn Clarke, who reportedly has been forced out.
Parseghian promptly handed over responsibility for the entire restatement effort to Baumann, a former deputy chairman and global banking leader of PricewaterhouseCoopers.
Press reports indicate that Leland Brendsel was forced out as chairman and CEO. The board named Shaun O'Malley, a retired Price Waterhouse LLP chairman, as nonexecutive board chairman.
A management shake-up, however, doesn't go far enough toward "correcting serious problems—concerns surrounding management practices and controls" at the company, Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight (OFHEO), said in a letter to the board before the changes were announced.
OFHEO, the federal overseer of both Freddie Mac and Fannie Mae, charges the former company with "management misjudgments that led to a misapplication of GAAP principles and...employee misconduct, specifically, altering and failing to supply documents relevant to the restatement process."
In his letter, Falcon told Freddie Mac directors to hand over their plans for reform of board oversight of management accounting supervision. He also said he was dispatching a special team to investigate the company's review of a reaudit that revealed accounting and controls failings.
The board will also have to fess up to OFHEO about its rationale for the termination-pay packages of Brendsel, Clarke, and Glenn. Brendsel is slated to receive his full retirement benefits, while Glenn will get health and retiree benefits but no severance, according to Dow Jones Newswires. Clarke, the former finance chief, received a separation agreement, according to the news service.
Freddie Mac is also facing a Securities and Exchange Commission probe of possible securities law violations, according to the Wall Street Journal. The SEC will reportedly focus on whether the company deferred income to smooth future results and whether the CEO and CFO might have broken the law by certifying false financial statements.
Some top lawmakers have voiced worries about the effect of Freddie Mac's woes on the housing market, according to a report by the Associated Press. Their concern: Banks could sell fewer mortgages to Freddie Mac, and global capital flow into the U.S. mortgage market could be squeezed. Such a domino effect might lead to higher interest rates on home loans.
That, in turn, could slow the long-awaited business recovery in the United States. Observers say the robust housing market, along with corporate cost-cutting, has been pumping up the economy of late. Higher interest rates would likely burst the property boom—and any hopes of an economic turnaround this year.
Needed: $36 Billion in Pension Contributions
Underfunded defined-benefit pension plans sponsored by Standard & Poor's 500 companies could require a boost of about $36 billion in the next 16 months.
This according to a study of defined-benefit plan disclosures in the 10-K filings of the constituent companies of the S&P index. The research, which was conducted by turnaround specialist FTI Consulting, examined GAAP pension data and disclosures for fiscal 2002.
The study found that most of the companies in the bellwether index would have to inject funds into their plans this year. Out of 354 S&P 500 corporations offering defined-benefit pensions, 215 will likely need to make added contributions in the next 16 months, predicts FTI.
Some pension sponsors will endure some pretty hefty hits, too. For 19 of the S&P 500 companies, funding requirements will top 30 percent of their most recent fiscal year's free-cash flow. The study's authors also predict those companies will have to insert 30 percent of their cash balance (or net working capital, if greater) into their defined-benefit funds.
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