A Firestorm for Freddie
One day before mortgage finance giant Freddie Mac (FRE) is scheduled to report second quarter earnings, a Tuesday report at the New York Times has managed to stir up the latest controversy surrounding the GSE, suggesting that CEO Richard Syron ignored advice from internal advisors regarding financing risky loans. The paper, citing various unnamed sources as well as a former chief risk officer at the company, said that Syron had been warned of the coming problems at the company and that had he heeded the warnings, the company may have avoided much of "the financial crises now engulfing it." Those same crises have hit sister GSE Fannie Mae (FNM), although the Times story singled out Syron in particular for allegedly turning a deaf ear to advisors. The story managed to generate a rare and stern response from Freddie officials, taking the NY Times to task for what they called "a superficial tale spun on the purported comments of a collection of anonymous former employees and unspecified 'others' -- likely including the well-worn band of ideologues and self-interested detractors who have opposed the GSE model for years." It doesn't get more blunt than that. If you thought the GSEs weren't a political beast, it's high time to think again. "The story is apparently based on the word of David Andrukonis, a former employee who was involuntarily terminated in 2005," said Freddie in a press statement." It describes a memorandum -- one we can't confirm the existence of, one we don't believe Mr. Syron ever saw, and one that Mr. Duhigg [the NYT reporter] never produced for us. Although the reporter was aware of these facts, he cited the individual's account without mentioning them, instead portraying the former employee as having left amicably to become a schoolteacher." The story went on to suggest that Syron's role at Freddie would change because of the alleged stubborness; an allegation that was strongly refuted by both HW's key sources, and a story published Tuesday afternoon in Investment Dealers' Digest. Officials at the now-former regulator Office of Federal Housing Enterprise Oversight told IDD that Freddie Mac's search for a new CEO comes as part-and-parcel of a long-standing agreement the regulator had with the GSE. Syron hold both chairman and CEO positions at Freddie; the company agreed in 2003 to split the two roles under an agreement with OFHEO that saw it restate its earnings amid an accounting scandal. Syron joined Freddie Mac in December 2003. In July, Freddie cleared a long-standing hurdle when it registered with the Securities and Exchange Commission so it can issue common and preferred stock to raise $5.5 billion in much-needed capital; the NY Times story painted the GSE's delay in raising capital as a move of "defiance" by Syron. Freddie Mac, for its part, characterized the Times' take on the timing of it's pending capital raise "bizarre." "As we told the reporter, while our CEO and senior management team wanted to raise that capital quickly, our own internal and external legal counsel, counsel to the Board and our bankers and counsel to our bankers -- advised us of the significant risk of commencing a public offering due to the timing of the second quarter release and until after we completed our registration with the SEC, which we have since done," the company said in its press response. Freddie Mac's earnings are due Wednesday. The company is expected to post a loss of 53 cents a share on $2.18 billion in revenue, according to estimates compiled by Thomson Financial. Disclosure: The author was long FRE, and held no positions in FNM when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.