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Introduction
Freddie Mac's accounting problems were different from those at scandal-ridden
companies like Enron and WorldCom because it had been not a case of outright looting of the
corporate by its executives. Nevertheless, they did break the law and their activities constituted a
fundamental breach of business ethics. the corporate said that it had manipulated its earnings to
fulfil Wall Street's desired objective of steady earnings growth. thereto end, it succeeded in doing so
and keep its stock prices high, it's not hurt investors to date. But joined of the four largest financial
institutions within the U.S., its financial problems could create a "systemic risk" - the risk that a
problem in one area, in this case the housing market, could spread and have serious adverse effects
on the economy as an entire. The savings and loan crisis of the 1980s illustrated the riskiness of the
mortgage market. If interest rates rise, financial institutions may find that their cost of funds exceeds
their income for long-term, fixed-rate mortgages. If rates fall, homeowners refinance their mortgage
and reduce income streams to institutions, which must still pay off debt previously issued at higher
interest rates. Protection from charge per unit risk is critical to soundness of the GSEs, and it appears
that strategies to avoid, or “hedge” risk were partly to blame for Freddie’s recent accounting
problem. Also at issue are oversight and regulation.
The company's accounting misdeeds were revealed just days after the federal regulator responsible
for its financial oversight gave it a clean bill of health. additionally, it's not met its specific public
interest mission, which is to enhance opportunities for home ownership and affordable rental housing
for low-income and minority populations.

Company’s Working
The company had majorly two functions i.e., its housing mission and its overall viability.[2] The
housing mission in overlooked by the U.S. Department of Housing Land and Development
(hereinafter referred as ‘HUD’) which is to blame for maintaining affordable prices of housing
facilities. Further the opposite function is overlooked by the Office of Federal Housing Enterprise
Oversight (hereinafter referred as ‘OFHEO’) which may be a subordinate a part of the HUD but
generally operates independently. The Housing Mission dictates that the corporate shall provide 50
percent of loans for affordable housing, 30 percent of loans for undeserved rural and
concrete areas and therefore the remaining 20 percent shall be provided for low-income families.
But the corporate has did not adjust to this scheme and is for years had been engaged in providing
loans to the centre class which was more profitable for the corporate and ignored the mission of
providing affordable housing to people. Following such acts and work culture, the OFHEO issued a
report which unveiled the company’s inappropriate management of earnings and improper conduct in
doing business. The agency with intention to satisfy the goals of providing affordable housing has
terminated the services of company’s CEO and other top executives. It further imposed a civil money
penalty on the chairperson and other top executives of the corporate.
The Scandal
A December 2003 report by the Federal Reserve Board finds that Freddie like Fannie benefits from
its government connection way more than homeowners do. additionally, to being exempt from
state and native taxes and a credit line of $2.25 billion from the federal government (the Treasury
Department is authorized by Congress to buy$2.25 billion of its securities just in case of a default),
the Congressional Budget Office estimates that Freddie's federal subsidies are valued at more than
$10 billion. Rather than boosting homeownership, the federal subsidies help the company's
shareholders because it increases the company's earnings. The implicit guarantee of its credit line
from the national allows it to borrow at interest rates by about half a decimal point less
than comparable borrowers. By comparison, the typical mortgage rate is reduced by but tenth of
a decimal point. This amounts to a savings of $87 a year for a typical homeowner. The
company's profit for 2002 was $10.1 billion (data for 2003 is not available). Former CEO and
Chairman Leland Brendel was awarded a cash bonus of $2.1 million, additionally to his salary of
$1.1 million before being ousted last year. Bonuses for Top executives for 2001, the year the
corporate inflated its profits, were supported corporate performance.

Legal Steps
A law suit was filed by Securities Exchange Commission (hereinafter referred as ‘SEC’) which
stated that the corporate had deceived the investors by not disclosing actuality picture of the
corporate and engaged in fraudulent activities which further deceived the investors about the
particular performance of the corporate. the corporate had to pay an amount of 125 million dollars
penalty so as to settle civil securities fraud charges imposed by federal regulators in an accounting
lapse of 4 years. Except this, the previous top executives of the corporate viz. the President of the
corporate, former chief money handler, and two former senior vice presidents, settled negligent
conduct charges by paying an amount of 515,000 dollars in civil fines. It was further decided that the
number of penalties shall be utilized for the aim of constructing good the loss incurred by
shareholders.
H.R.1427 - To amend the Internal Revenue Code of 1986 to provide that certain bona fide residents of the
Virgin Islands who are shareholders of corporations organized under the laws of the Virgin Islands are not
treated as United States persons for purposes of determining certain inclusions in gross income with respect
to such corporations.

History of S. 1100 - A Bill To Amend Title 41, United States Code, To Prohibit Inserting Politics Into The
Federal Acquisition Process By Prohibiting The Submission Of Political Contribution Information As A
Condition Of Receiving A Federal Contract; To The Committee On Homeland Security And Governmental
Affairs.

Government & Company Steps

After the accounting fraud was unfolded the corporate established a committee of Corporate
Governance so as to form sure that the accounting standards and guidelines referring to corporate
governance are necessary while undertaking business transactions. the corporate also further stated
that it intends to separate the positions of CEO and chairman by 2006. Further, with the intention to
strengthen company’s corporate governance policies, guidelines and practices, the corporate retained
the services of Mr. Charles Elson. The Parliament also took initiative to mark a change within the
current law and policies. Parliament enacted two bills viz.H.R. 1427 and S. 1100 which proposed to
amend the structure of GSE Regulations. The bills also replace OFHEO with a government agency
for the regulation of such financial institutions.

Analysis
In December 2003 crop, the federally chartered mortgage financing giant , agreed to pay a civil
penalty of $125 million and implement measures to correct its accounting and governance problems
as part of a consent order with a federal regulator. the corporate faced a criminal investigation by the
Justice Department and a civil inquiry by the Securities and Exchange Commission. When the
company’s problems imploded earlier, the McLean, Virginia-based firm declared that its accounting
errors were different from those plaguing corporate America during that year. Rather than inflating
its earnings, the company had understated its profits. But when the corporate restated its financial
statements of November 2003,it disclosed that its cumulative earnings for the years 2000-2002 were
higher than what it had reported originally, and it had inflated its earnings for 2001 by nearly
$1billion. per Standard & Poor's, "news of the one year of inflated earnings adversely changes the
character of the accounting controversy because it reflects an even more volatile true earnings
profile. “The Fed study also said that the complex accounting methods used by the company are hard
to understand. Such questionable methods are a risk for taxpayers who would be expected to bail out
the firm with its billions of dollars in loans and debts if it had financial problems.
A company spokesman called the study "an interesting but fundamentally flawed academic
exercise," while a senior vice chairman said that the findings were "highly theoretical and bear no
resemblance to the reality experienced in the housing industry and capital markets a day."

Conclusion

It is clear that oversight of the company was completely inadequate at all levels. The OFHEO
(Office of Federal Housing Enterprise Oversight) failed in its responsibility to ensure its safety and
soundness. HUD allowed it to stray from its fundamental mission of expanding home ownership and
affordable housing. The company's board, as the OFHEO report points out, was complacent and
failed to exercise adequate oversight. But that does not justify calls for privatization of Freddie Mac
and elimination of its core public mission of providing affordable housing for low-income and
minority populations. Current proposals to create a more effective and independent regulatory
agency could work if they don't become a victim of interagency battles. GSEs like Freddie Mac
should have the same disclosure rules that apply to other financial institutions. When oversight of an
institution as important as Freddie Mac falls on one of the smallest federal regulatory agencies, the
public has reasons to be worried. At the same time, the company needs to do more than just step up
its political lobbying expenditures and fulfil its obligation of expanding opportunities for home
ownership and affordable rental housing.