Académique Documents
Professionnel Documents
Culture Documents
PREPARED BY:
N
O.
1.
NAME.
NO. I/D
NURULALIYANI PUTRI
BINTI MOHAMAD IZAHAR
62288214096
2.
62288214120
3.
4.
PREPARED
62288214332
FOR:
MUHAMMAD BIN HASSAN
62288313137
CLASS:
AC 20
Table of Contents
1.0 COMPANYS PROFILE.......................................................................................... 2
1.1 SENIOR OPERATING COMMITTEE.....................................................................4
1.2 BOARDS OF DIRECTOR.................................................................................... 5
2.0 MAIN PLAYERS................................................................................................... 6
3.0 TIMELINE OF FREDDIE MAC COMPANY................................................................7
3.1 THE SEC'S JUDGMENT...................................................................................... 8
4.0 FRAUD SCHEME............................................................................................... 11
5.0 FINAL DECISION............................................................................................... 13
6.0 CONCLUSION................................................................................................... 15
7.0 RECOMMENDATION.......................................................................................... 16
Freddie Mac is a Government-Sponsored Enterprise (GSE), that is, a business entity that
has a distinct relationship with the government. GSEs usually enjoy special perks and
privileges that other businesses do not receive. Freddie Mac, for example, is exempt from
state and local taxes. Neither is it subject to standard disclosure rules imposed on other
financial institutions. It is rated by credit rating agencies such as Moody's. GSEs such as
Freddie Mac are among the world's largest securities issuers.
Freddie Mac is one of the biggest buyers of home mortgages in the U.S and is a publicly
traded company. It buys mortgages from mortgage lenders, such as commercial banks and
other financial institutions, repackages them as (mortgage-backed and debt) securities, which
are then purchased by investors. Mortgage-backed securities are more liquid than individual
mortgages. Institutions like Freddie Mac make their profits from the difference between the
cost of its debts and the return on its mortgage holdings. Their role is to serve as a secondary
market conduit between mortgage lenders and investors. Mortgage lenders use the proceeds
1
from selling loans to Freddie Mac to fund new mortgages. In this way, Freddie Mac
replenishes and increases the supply of funds available for homebuyers and apartment owners
from mortgage lenders. About 55% of all new single-family home mortgages today are sold
to secondary market conduits.
1.1.
Donald H.
Layton
Chief
Executive Officer
David M. Brickman
Executive Vice President,
Multifamily Business
James G. Mackey
Executive Vice President and
Chief Financial Officer
Michael Hutchins
Executive Vice President,
Investments and Capital
Markets
William McDavid
Executive Vice President,
General Counsel and
Corporate Secretary
Timothy F. Kenny
Senior Vice President and
General Auditor
Dwight Robinson
Senior Vice President of
Human Resources, Diversity &
Inclusion and Chief Officer.
David Lowman
Executive Vice President,
Single-Family Business
Carol Wambeke
Senior Vice President and
Chief Compliance Officer
Robert Lux
Executive Vice President and
Chief Information Officer
Jerry Weiss
Executive Vice President and
Chief Administrative Officer
Raphael W. Bostic
Bedrosian Chair in
Governance and
Public Enterprise
University of Southern
California
Carolyn H. Byrd
Chairman and Chief
Executive Officer
GlobalTech Financial,
LLC
Lance F. Drummond
Retired Executive Vice
President, Operations
and Technology TD
Canada Trust
Thomas M.
Goldstein Veteran
Financial Services
Executive
Richard C. Hartnack
Retired Vice Chairman
and Head of
Consumer and Small
Business Banking U.S.
Bancorp
Steven W.
Kohlhagen Veteran
Financial Services and
Investment Industry
Executive
Donald H. Layton
Chief Executive
Officer Freddie Mac
Christopher S.
Lynch: Non-Executive
Chairman Retired
Partner KPMG LLP
Sara Mathew
Retired Chairman and
Chief Executive
Officer The Dun &
Bradstreet
Corporation
Saiyid T. Naqvi
Retired President and
Chief Executive
Officer PNC Mortgage
Nicolas P. Retsinas
Senior Lecturer in Real
Estate Harvard
Business School
Eugene B. Shanks,
Jr. Former President
Bankers Trust
Company
Anthony A. Williams
Chief Executive
Officer and Executive
Director Federal City
Council
Vaughn
Clarke
ExChief
Financi
al
Officer
Leland
Brends
el
Chairm
an/Chie
f
Executi
ve
Officer
Robert
Dean
and
Nazzir
Dossan
i Senior
Vice
Preside
nts
David
Glenn
Preside
nt/Chie
f
Operati
ng
Officer
In charge of total
management of the
company
2002
Jan 2003
Jun 2003
Nov 2003
Difference
2000 $2.547
$3.666
$ 1.119
2001 4.147
3.158
(0.989)
2002 5.764
10.090
4.326
Dec 2003
Oct 2005
Nov 2005
Difference
2000 $2.547
$3.666
$ 1.119
2001 4.147
3.158
(0.989)
2002 5.764
10.090
4.326
The second consequence of the fraud is that it supplies the corporate executives with
incentives to engage in insider trading. The market thinks the business entity has the lower
income and may bid down the stock price and the bond prices. The managers who are
partaking in the fraud know that the earnings stream is actually higher and can profit from
this knowledge illegally.
The third consequence is that the market may misestimate the risk of the corporation and, in
this case, that seems to provide the motivation for the accounting fraud. Corporate managers
wanted to portray a picture of a steady, reliable company that was ever growing in resources
and income. That picture was phony inasmuch as the true income stream is far more volatile
than the reported earnings would indicate.
This case is fascinating for another reason. The SEC continues to give miscreants a slap on
the wrist while hitting the innocents with a massive fine. Yes, I said that the SEC continues to
dote on the bad guys by only slapping their wrist. The largest fine plus disgorgement is only
$400,000. For the salaries and stock options and perquisites that these guys got while
working at Freddie Mac, the fines plus disgorgement amounts to a speeding ticket for those
mortals with at most six-digit incomes. The fines are trivial. If the SEC wants to dissuade
managers from committing accounting frauds, then they must impose meaningful and
enormous fines and prison sentences. Petty and insubstantial fines imply that the SEC no
longer cares for investors and creditors. And managers at other entities surely take notice.
Worse, the SEC fined Freddie Mac $50 million; interestingly, this is the same amount the
SEC fined Tyco for its shenanigans. But, who is really paying this $50 million fine? That's
right; it is the investors of Freddie Mac -- those who were defrauded by the management
team!
(We could analyse this more deeply by stating that the current investors are not necessarily
the same investors who lost their shirts when the prices tumbled. Even so, assuming an
efficient market, the current investors subtracted out the estimated fines to be paid by the
corporation for this fine. Assuming an unbiased estimate, we are then back where we started:
the investors at the time of the scandal are paying this $50 million fine.)
The SEC apparently does not understand the purpose of civil penalties and criminal sentences
in our society. While they satisfy our collective sense of justice, more importantly, society
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issues civil penalties and criminal sentences to deter future crimes. If the disincentives are
sufficiently repugnant and if the probability of enforcement is sufficiently high, then future
managers are less likely to commit accounting frauds.
If the SEC hopes to deter future accounting frauds, it must align its punishment with the
thieves who carry out these misdeeds instead of punishing the shareholders. Next time the
SEC ought to fine the executives $50 million each. That would send the right message to
Wall Street. And it would alleviate the pain and suffering by the shareholders.
In a lawsuit filed in federal court in Washington, the SEC said Freddie Mac "engaged in a
fraudulent scheme that deceived investors about its true performance, profitability and growth
trends."
"As has been seen in so many cases, Freddie Mac's departure from proper accounting
practices was the result of a corporate culture that sought stable earnings growth at any cost,"
SEC Enforcement Director Linda Thomsen said in a statement.
The SEC said Thursday that the $50 million Freddie Mac agreed to pay will be distributed to
shareholders injured by the alleged accounting fraud. The settlement with the company is
subject to court approval.
Fannie and Freddie were created by Congress to make mortgages affordable and pump cash
into the market by buying blocks of home loans from lenders and bundling them into
securities for sale to investors worldwide.
In a lawsuit filed in federal court in Washington, the SEC said Freddie Mac "engaged in a
fraudulent scheme that deceived investors about its true performance, profitability and growth
trends."
"As has been seen in so many cases, Freddie Mac's departure from proper accounting
practices was the result of a corporate culture that sought stable earnings growth at any cost,"
SEC Enforcement Director Linda Thomsen said in a statement. "Investors do not benefit
when good corporate governance takes a back seat to a single-minded drive to achieve
earnings targets."
The SEC said the $50 million Freddie Mac agreed to pay will be distributed to shareholders
injured by the alleged accounting fraud. The settlement with the company is subject to court
approval.
In a separate action Thursday, OFHEO issued a consent order against Clarke, under which he
agreed to cooperate with the agency in its proceedings against other former Freddie Mac
executives. Clarke also agreed to pay a $125,000 civil fine _ which OFHEO deemed to have
been satisfied by his payment of the same amount under the SEC accord _ and to forego any
bonuses owed him by Freddie Mac. OFHEO previously fined Glenn $125,000 and is
pursuing action against Brendsel.
Clarke agreed to pay $29,227 in restitution under the settlement with the SEC. Glenn is
paying a $250,000 civil fine and $150,000 in restitution, Dean is paying a $65,000 fine and
$34,658 in restitution, and Dossani is paying a $75,000 fine and $61,663 in restitution.
6.0 CONCLUSION
The scandal affected the executives that were involved as well as companys customers.
Freddie Mac scandals also the big economic crisis in U.S during that time. During this time,
the companys financial statements were not doing so well at all. The firm income and assets
were affected and started to decrease. Freddie Mac is in danger of going bankrupt as their
stock value is basically worthless.
To be sure, Fannie Mae and Freddie Mac were flawed companies that made several bad
business decisions, and taxpayers should never again have to foot the bill for any financial
institutions greed. But as policymakers look to the future of U.S. housing finance, they must
seek smart reforms that focus on what was broken in the previous system, while maintaining
what worked for decades. The federal government must continue to play a key role in the
housing market, regardless of whether it works through Fannie and Freddie, a new agency, or
purely private firms.
It is clear that oversight of the company was completely inadequate at all levels. The Office
of Federal Housing Enterprise Oversight (OFHEO) failed in its responsibility to ensure its
safety and soundness. HUD allowed it to stray from its fundamental mission of expanding
home ownership and affordable housing. The company's board, as the OFHEO report points
out, was complacent and failed to exercise adequate oversight.
But that does not justify calls for privatization of Freddie Mac and elimination of its core
public mission of providing affordable housing for low-income and minority populations.
Current proposals to create a more effective and independent regulatory agency could work if
they don't become a victim of inter-agency battles. GSEs like Freddie Mac should have the
same disclosure rules that apply to other financial institutions. When oversight of an
institution as important as Freddie Mac falls on one of the smallest federal regulatory
agencies, the public has reasons to be worried. At the same time, the company needs to do
more than just step up it political lobbying expenditures and fulfil its obligation of expanding
opportunities for home ownership and affordable rental housing.
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7.0 RECOMMENDATION
The settlement and the report may help Freddie Mac, the nation's second-largest buyer of
home mortgages behind its corporate sibling, Fannie Mae, to recover from an accounting
scandal that surfaced early this year. But some of the report's recommendations suggest that
regulators may impose new restrictions on the company. They also suggest that regulators
will now shift their focus to the Wall Street firms that engaged in certain transactions with the
company and to accounting at Fannie Mae.
The report by the Office of Federal Housing Enterprise Oversight does not shed much new
light on the transactions at the centre of the improper accounting, which sought to smooth out
earnings volatility, but it is much harsher than previous reports in its assessment of Freddie
Mac's executives and board members.
Freddie Mac reported its revised earnings last month, disclosing that it had understated net
income by nearly $5 billion over more than three years. Many of the transactions that were
accounted for improperly, including swaps and reserves for loan losses, were described in a
preliminary report to the board by an outside law firm and in a supplemental report released
with the restatement. Some lawmakers greeted the report as further evidence of the need for
an overhaul of the regulation of government-sponsored entities, including Freddie Mac and
Fannie Mae.
The information in Ofheo's report clearly confirms that there were serious accounting,
disclosure and management issues that led to Freddie Mac's earnings restatement,'' Senator
Richard C. Shelby of Alabama, chairman of the Senate Banking Committee, said in a
statement. ''It also serves to underscore the deficiencies of Ofheo as a regulator, in that Ofheo
never detected the breakdown in the accounting and audit function at Freddie Mac. The
Banking Committee will continue to consider legislative reform for the G.S.E.'s to ensure that
they have a strong and credible regulator.
Under the terms of the settlement, in addition to the $125 million fine, Freddie Mac's board is
required to review and as necessary revise its bylaws and the frequency of its meetings, along
with the company's codes of conduct. The board is also required to determine whether to
impose limits on the terms of its members. The company, in turn, is required to report on its
internal controls and on plans for strengthening its internal audit function. The company is
required to separate the jobs of chief executive and chairman.
Some of the recommendations in the agency's report -- which Mr. Falcon, the director, said he
might or might not impose on the company -- are more severe. The report proposes
increasing the amount of capital that the company must retain and limiting how much its
portfolio of mortgages may grow. Finally, the report recommends that the regulatory agency
examine the accounting practices of Fannie Mae; the agency has already received bids on that
project, Mr. Falcon said. The agency is also continuing its investigation into investment firms
that participated in the transactions that were accounted for improperly, according to the
report.