FBI investigates Freddie Mac losses

Nearly $3.7 billion in losses still to be recognized in Freddie Mac's quarterly earnings statements may soon face FBI scrutiny. The FBI is looking into possible accounting violations at Freddie Mac resulting in the delay of reporting billions of dollars in losses from derivative interest-rate swaps, according to a report in the Wall Street Journal today.

The Journal quotes from a February 2008 confidential report by the investigative firm Kroll that concluded "inappropriate application" of accounting rules "enabled Freddie to defer billions of dollars of losses incurred from 2001 to 2004" on derivative contracts whose value depends on fluctuations in interest rates. FBI investigators obtained a copy of that report, which has not yet been released publicly, and is currently seeking additional information.

Freddie Mac lost a total of about $7.9 billion on derivatives trading as of December 31, 2004, but has only been reporting those losses gradually over the quarters since then. There are still $3.68 billion is looses to be reported over the next decade. Freddie Mac used "hedge accounting" to try smooth out the losses, and in doing so may have violated the rules, found the auditors.

The Justice Department and the SEC continue their own investigations into a range of accounting practices at both Freddie Mac and Fannie Mae. No details have been released about these probes.

Of course, the barrage of investigations into Freddie Mac will be a lot more difficult now that CFO David Kellermann was found dead in his Virginia home in the middle of April. This has widely been reported as a suicide.

David Moffett, the former government-appointed CEO who resigned from Freddie in March, will serve as a consultant to help sort out the accounting (and now legal) mess. The company is still searching for a permanent CFO.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.

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