Freddy Mac Fraud

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Freddie Mac is a financial services company. Congress chartered the company in 1970 with the statutory mission of providing liquidity, stability and affordability to the U.S. housing market. According to the company’s website, Freddie Mac’s main line of business is buying mortgage loans and mortgage related securities in the secondary market. Since they operate in the secondary market, Freddie Mac does not issue mortgages themselves but they buy mortgages, as whole loans, and mortgage backed securities for investment. The company also issues guaranteed mortgage-related securities that sell in the secondary market. In the beginning of the 21st century, Freddie Mac found itself in the center of an accounting scandal. According to an SEC disclosure …show more content…

According to the Baker Botts investigation, the company started maneuvering its gains and losses in early 2001 with the concurrence of its auditor Arthur Andersen — Baker Botts was the law firm that the board hired to investigate the accounting fraud (Barta, McKinnon and Zuckerman). By the fall of 2001, Freddie Mac started using other accounting tools to smooth out future earnings and an Arthur Andersen partner objected but gave an unqualified opinion on their financial statements (2002 Annual Report). The next year the company fired Arthur Andersen and brought in PricewaterhouseCoopers as the auditor. PricewaterhouseCoopers refused to certify the company’s book, prompting the board to contract Baker Botts to investigate the company’s books in January …show more content…

Later in the year, the Office of Federal Housing Enterprise Oversight (OFHEO) issued a report detailing the occurrence and the board negligence in accepting the changes in accounting in order to fix their earnings (Barta and McKinnon). OFHEO is the federal regulator in charge of overseeing the government-sponsored companies Freddie Mac and Fannie Mae. OFHEO also punished Freddie Mac with a $125 million settlement and a series of additional penalties such as separating the functions of CEO and chairman, as well requiring Freddie Mac to hold more capital and limiting their growth temporarily. As far as management is concerned, the former COO, CFO and two vice presidents had to pay civil penalties and disgorgement charges to the federal

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