freddie mac delays statement: ominous?

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    Freddie Mac Delays Restatement
    By Mark Felsenthal

    WASHINGTON (Reuters) - Scandal-tarnished mortgage finance company Freddie Mac (NYSE:FRE - news) on Thursday delayed an earnings restatement by two months and warned that its underreporting of earnings may be bigger than it previously thought.

    Freddie Mac has acknowledged that senior executives ignored accounting standards to push earnings into the future to sustain the image of steady earnings growth.

    The company estimated in June it had underreported 2000-2002 earnings by between $1.5 billion and $4.5 billion but said on Thursday the amount is likely to be closer to or greater than the higher estimate.

    Freddie Mac's most recent setback, which follows replacement of five senior executives over the summer in connection with accounting irregularities, came as Congress moved closer to creating a tougher regulator for Freddie Mac and sibling Fannie Mae (NYSE:FNM - news) to reassure financial markets.

    "There is broad agreement that the current regulatory structure for the (government-sponsored enterprises) is not operating as effectively as it should," House Financial Services Committee Chairman Michael Oxley said at a hearing. The committee could pass a bill housing a new regulator at the Treasury Department (news - web sites) as early as next week, he said.

    The company's stock has fallen 18 percent and wiped out $8.4 billion in market value since the earnings troubles surfaced in January. Freddie Mac shares fell 6 cents, or less than 1 percent, to $53.22 in trading on the New York Stock Exchange (news - web sites).

    Freddie Mac debt was little changed from Wednesday.

    The company had planned to release its restated results for 2000 to 2002 by Sept. 30 but said it would now put them out in November. Chief Financial Officer Martin Baumann blamed the delay on problems with computer system changes Freddie Mac must put in place to account for asset transfers and bundling of home loans to create mortgage-backed securities that are sold to investors.

    "This delay does not result from new accounting errors," Baumann said.

    Analysts doubted the delay would be significant problem for the company.

    "It's a disappointment, but not a disaster," Chris Buonafede, analyst at Fox-Pitt Kelton, said of the restatement postponement. He has a buy rating on Freddie's stock.

    Freddie Mac's current regulator said the company's 2003 earnings reports -- which have been held up by the restatement -- could be ready by the end of this year. But registration of its securities with the Securities and Exchange Commission (news - web sites), which Freddie Mac pledged to do last year to give investors a clearer picture of its books, will not happen until mid-2004, Freddie Mac board member George Gould told Congress.

    Beyond its internal turmoil, Freddie Mac has been a lightning rod for critics who have long called for stronger oversight over the company, Fannie Mae, and the Federal Home Loan Bank system.

    Lawmakers appeared willing to put aside differences over the new regulator's authority in favor of quickly reassuring markets of government vigilance.

    "Others may suggest radical new capital regimes, perhaps unreasonable constraints on new product approval, or attacks on the basic structure of the charter. I do not intend and will not go there. Responsible regulatory oversight is the goal," said Louisiana Republican Richard Baker, who has for several years criticized government scrutiny of Fannie Mae and Freddie Mac.

    Fannie Mae (FNM.N) chief executive Franklin Raines said on Thursday a stronger regulator would benefit his company and Freddie Mac but urged Congress not to raise the companies' minimum capital requirement.

    "Strengthening our financial regulator is the natural next step of congressional actions that have made the (government-sponsored enterprise (news - web sites)) construct an enormous success," he said in testimony before the Financial Services Committee.

    A debate over whether to give the new regulator responsibility for overseeing the 12 regional Federal Home Loan Banks is also unlikely to hold up the move to create a new regulator.

    Fannie Mae and Freddie Mac are shareholder-owned companies chartered by Congress to expand home ownership. They owned or had financed 45 percent of the $7.2 trillion U.S. mortgage debt outstanding as of the end of March.

    The Federal Home Loan Bank system, owned by banks, thrifts and credit unions, was also created to increase home ownership and is regulated by the Federal Housing Finance Board.

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