WASHINGTON (AFX) - U.S. Assistant Treasury Secretary Emil Henry Thursday cited 'new and troubling revelations that Freddie Mac's accounting and internal controls continue to be in disarray.'
In a speech in which he first centered on Fannie Mae's recent $400 million settlement to resolve accounting and other problems, Henry said of Freddie Mac that 'they have recently reported that they can 'begin' the registration process' with the Securities and Exchange Commission only after releasing full year 2006 results.
'Is it reasonable for Freddie Mac to begin this process over five years after announcing that they would register with the SEC?' the Treasury official asked.
Just as troubling, he said, is Freddie Mac's recent announcement that it needs to limit the number of internal controls initiatives and defer 'lower priority' internal control efforts.
'While it is not clear exactly what actions would be limited or deferred, given the scope of Freddie Mac's ongoing problems any lack of full attention to internal control efforts has to raise questions of the appropriate allocation of resources,' Henry said.
Richard Syron, Freddie Mac's chairman and chief executive officer, said in a recent conference call with analysts that 'we have accelerated our efforts to complete the needed improvements to our internal controls and infrastructure. This is our highest and most urgent priority.'
Both Freddie Mac and Fannie Mae are government-sponsored enterprises, or GSEs, created to make housing more affordable. Both are also working to emerge from accounting scandals.
'As a former Wall Street banker, I can tell you that I cannot imagine any non-GSE company being able to maintain its status in the capital markets with such an unremedied speckled past,' Henry said. 'Indeed, one said irony of this situation is that the two entities that impose some of the most systemic risk to our system are held to some of the lowest standards of accountability.'
He said the Treasury, 'at least in the context of GSE reform legislation,' is on record suggesting that the lines of credit the GSEs enjoy with the Treasury will only be used under very limited circumstances such as a GSE emerging from receivership.
Stressing the need for Congress to pass GSE regulatory reform legislation, Henry also noted that Treasury Undersecretary Randal Quarles earlier this week said the department has undertaken a review of the GSE debt approval process. 'I want to reiterate that we have no doubt about our authority regarding approving GSE debt, which we do on a regular basis, but we are rethinking the process by which Treasury uses that authority,' he said.
Henry recalled that the Treasury a decade or so ago adopted a process that was characterized as a voluntary, cooperative process that would enable the GSEs to more flexibly time and size their borrowings, but added that the process has continued to evolve since then and that 'as we digest all the information that we have learned about the GSEs in the past few years, we believe it is important to reconsider how our debt approval authority is administered.'
He said that 'consistent with our debt approval authorities, we will consider whether we want additional information, such as: the amount of total debt outstanding, the estimated rate that the debt will be offered, and the maturity of the debt obligations.
'This is, of course, not an exhaustive list of what we will consider as our review goes forward,' he said. 'We have made no conclusions at this time about whether or not a process change is necessary, but in some sense, everything is on the table.'
Fannie Mae's top regulator said Thursday that his agency has discovered new 'control problems' at the mortgage giant as recently as several weeks ago.
James B. Lockhart, acting director of the Office of Federal Housing Enterprise Oversight, said both Fannie Mae and Freddie Mac will take several years to correct their internal control problems.
'Neither of these companies are timely reporting at this point,' he said.
He said Fannie Mae and Freddie Mac 'are not even close to conforming with Sarbanes Oxley, at this point.'
'These companies were so poorly run that it is going to take many years to fix,' he said.
Shares of Freddie Mac rose 18 cents, or 0.3 percent, to close Thursday at $57.76 on the New York Stock Exchange. The company is based in McLean, Va.
Shares of Fannie Mae rose 95 cents, or 2 percent, to close at $48.21 on the NYSE. It is based in Washington.
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