Freddie Mac replaced its top three executives yesterday over an accounting inquiry, triggering fears about how the number two US mortgage finance company manages its $1.29 trillion (€1.10 trillion) portfolio of home loans.
The shake-up helped upset the stock market and push the yield of Treasury bonds to near 45-year lows, as investors fled mortgage-backed securities. The stocks of government-chartered agencies like Freddie Mac and Fannie Mae, the number one home-loan buyer, fell sharply. Shares of other mortgage lenders and hot housing stocks also fell, and the dollar weakened.
Investors are concerned that Freddie Mac's woes could undermine the housing market, which has been the main pillar of strength in an economy that has struggled since the bursting of the stock market bubble in 2000.
"This is bad," said Mr Paul Miller, an analyst at Friedman, Billings, Ramsey.
"We've always felt that there was more here than met the eye, and it turns out that's exactly what it is." Freddie Mac said it fired its president and chief operating officer, Mr David Glenn, for not fully co-operating with a review of the company's earnings statements from 2000 through 2002.
In a conference call, the company said Mr Glenn altered diaries he provided to the counsel for the audit committee.
The agency charged with regulating Freddie Mac, the Office of Federal Housing Enterprise Oversight, said in a letter to the company's board of directors that the shake-up "only goes part of the way toward correcting serious problems".
The agency said it had deployed a special team to investigate the re-audit of Freddie Mac, a government-chartered corporation.
Mr Armando Falcon, director of the agency, said in the letter written on Saturday: "I have become increasingly concerned about evidence that has come to light of weakness in personnel expertise in accounting areas and the disclosure of misconduct on the part of Freddie Mac employees." The group also announced the retirement of its chairman and chief executive, Mr Leland Brendsel, and the resignation of its chief financial officer, Mr Vaughn Clarke.
The board of the company based in McLean, Virginia, named Mr Gregory Parseghian its president and chief executive officer, Mr Shaun O'Malley as non-executive chairman; Mr Paul Peterson as chief operating officer and Mr Martin Baumann as chief financial officer.
Freddie Mac said its previously announced earnings restatement may be delayed until the third quarter.
Freddie Mac and Fannie Mae, created by the US government to increase home ownership, buy mortgages from banks and lenders and package them into bonds for sale to investors.
Their combined holdings of US home loans total about $3.3 trillion, equivalent to nearly 40 per cent of all outstanding mortgage debt in the United States.
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