Freddie Mac Report Soft-Pedals Thorny Case

Sometimes, no amount of whitewash can conceal the truth.

An eagerly awaited internal probe into Freddie Mac's (FRE - commentary - Cramer's Take) accounting missteps, released Wednesday, aimed to arrive at a thorough explanation of those shenanigans. And true to its mission, it dings ex-managers at Freddie for smoothing out profits, practicing poor disclosure and failing to cooperate with the board as it looked into the company's books.

But the report, conducted by lawyers employed by the board, came up well short of concluding that the accounting maneuvers themselves were wrong or misleading to investors.

Instead, with dubious generosity, the report suggests that present and former employees may not have known that several of the accounting moves were inconsistent with U.S. accounting rules, and it claims that senior management did not "abuse authority for personal gain."

Most unfathomably, on a conference call Wednesday, the chairman of Freddie's board, Shaun O'Malley, stood firmly behind Freddie's current CEO, Greg Parseghian -- even though a close reading of the report shows that he was connected to moves that led to over $1 billion of accounting adjustments. Freddie's former CEO, its president and its CFO all left earlier this year as the accounting issues were revealed. Most of the accounting moves being investigated took place in 2000 and 2001.

Good Faith?

On the conference call, James Doty of Baker Botts, the law firm doing the probe, said Parseghian "was aware that the objective of the transactions was to manage earnings," but added that "he relied in good faith on corporate accounting and Arthur Andersen to provide the necessary accounting advice and to ensure the transactions were accounted for in accordance with GAAP." GAAP stands for general accepted accounting principles.

While the report does take too soft an approach, it is clear from piecing together its findings that the accounting moves were deliberately designed to manage earnings and were often unusual in nature. Given those features, halfway decent managers would have gone out of their way to test their validity under GAAP. At this point, then, the soundest explanation for the managers' conduct is that they wanted to smooth earnings to please investors and pump up Freddie's stock, in which many of them were paid through options grants.

---

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to [e-mail].