FBI Looks Into Losses at Freddie

[girl gone mad]

FBI Looks Into Losses at Freddie
http://online.wsj.com/article/SB124104843794670911.html

Federal investigators looking into possible accounting violations at Freddie Mac are raising questions about whether the giant government-backed mortgage company improperly delayed the recognition of billions of dollars of losses, according to people familiar with the matter.

A confidential February 2008 report by the investigative firm Kroll concluded that "inappropriate application" of accounting rules "enabled Freddie to defer billions of dollars of losses incurred from 2001 through 2004" on derivative contracts whose value depends on fluctuations in interest rates, according to people involved in the matter. Those losses, currently pegged at about $3.7 billion, are due to be gradually recognized in quarterly earnings statements over the next several years.

Investigators from the Federal Bureau of Investigation have obtained a copy of that report, which was never publicly released, and recently sought more information on the issue, these people said.

The Justice Department and the Securities and Exchange Commission have been investigating a range of accounting practices at Freddie Mac and its larger rival, Fannie Mae, for at least six months. Both firm have disclosed the investigations but haven't provided details on the questions being raised.

A spokeswoman for Freddie said: "We are confident that our accounting treatment was appropriate and consistent with all applicable accounting guidance." A spokeswoman for Kroll, a New York-based unit of Marsh & MacLennan Cos., declined to comment. The regulator, the Federal Housing Finance Agency, said it had decided early last year "not to take issue with the accounting" despite the findings of Kroll, which had been hired by the regulator to look into the matter, a spokeswoman for the agency said. She cited "disagreement among the experts" and Freddie's defense of its accounting.

Freddie has long used interest-rate swaps, a type of derivative, describing them as a way to hedge against fluctuations in interest rates.

Until 2004, Freddie used a set of rules known as "hedge accounting" to recognize gains or losses on such derivatives over many years rather than including them immediately in earnings.

[aquart]

1. How very helpful for George.