Freddie Mac restatement increases 2002 earnings

Freddie Mac announced Nov. 21 the results of its restatement of previously issued consolidated financial statements for the years 2000 and 2001 and the first three quarters of 2002, and the revision of fourth-quarter and full-year consolidated financial statements for 2002.

The net cumulative effect of the restatement through Dec. 31, 2002 was an increase to the company's net income of $5 billion, which includes a net cumulative increase of $4.4 billion for 2000, 2001 and 2002 and $600 million related to periods prior to 2000. While the net cumulative effect of the restatement provided a significant increase in net income, 2001's net income decreased by $1 billion compared to previously reported results, primarily due to unrealized losses on derivatives not in hedge accounting relationships. The restatement also resulted in a net increase in regulatory core capital for each of the year ends affected and in a cumulative increase of $5.2 billion in the company's regulatory core capital as of Dec. 31, 2002.

"The restatement is a significant step in Freddie Mac's progress toward achieving accurate and timely financial reporting and controls," said Shaun F. O'Malley, chairman of Freddie Mac's board of directors, in a news release. "Freddie Mac completed this restatement while maintaining our business momentum and delivering on our congressional mandate to lower mortgage costs for America's homeowners."

Also, "the board's governance committee is directing a remediation program to ensure the integrity of Freddie Mac's financial reporting and prevent these types of problems from recurring," added George D. Gould, presiding director and chairman of the board's governance committee.

"The company has brought in a host of experienced accounting professionals and a new senior vice president for compliance, conducted Sarbanes-Oxley training for our employees and retained leading experts to assist us in implementing exemplary disclosure and governance practices."

Martin F. Baumann, executive vice president-finance and CFO, said, "The bottom line is that the restatement did not affect the fundamental strength of Freddie Mac's balance sheet. During 2002, we achieved outstanding growth in the fair value of net assets. Our capital position remains strong and our risk profile remains conservative, with an average monthly duration gap of negative one month for September 2003."

The restatement and related re-audit arose from Freddie Mac's re-evaluation, in conjunction with PricewaterhouseCoopers LLP, the company's independent auditors, of numerous accounting policies and their application to the company's transactions. Freddie Mac's board of directors appointed PwC in March 2002, replacing Arthur Andersen LLP.