Freddie Mac 2005 Net Falls

It takes charges to settle suits.
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Mortgage finance firm

Freddie Mac's

(FRE)

earnings declined 27% to $2.1 billion in 2005.

Some of the earnings decline at Freddie stemmed from legal costs associated with settling a shareholder lawsuit, arising from a 2003 investigation into the firm's faulty accounting practices.

Last year, Freddie earned $2.75 a share, down from $3.94 a share in 2004. For 2006, Wall Street analysts are expecting the McLean, Va.-based firm to earn $6 a share.

The 2003 accounting scandal at Freddie Mac that led to the shareholder lawsuit had delayed the release of the firm's 2005 results. The company had planned to report results in March.

Investigators found that Freddie, over a period of years, had understated profits by a total of $5 billion. The former managers of the government-sponsored firm had tried to push out earnings to future quarters in order to ease volatility. Freddie paid a $125 million fine to settle allegations arising from the accounting investigation.

In settling the shareholder suit, Freddie shelled out another $220 million.

But the lawsuit wasn't the only event that depressed earnings. The firm incurred $133 million in charges stemming from the devastation caused by Hurricane Katrina. Freddie's earnings also were impacted by an accounting change that reduced profits by $265 million. The accounting change dealt with the manner in which certain assets are valued.

Regulatory core capital was $36 billion at the end of December 2005, which is well in excess of the regulatory minimum surplus requirement of $11 billion.

Regulatory capital is the amount of money Freddie must set aside to cover any defaults in its massive portfolio of mortgages.

Freddie released its 2005 earnings just a week after its sister company,

Fannie Mae

(FNM)

, paid a $400 million fine for committing even worse accounting irregularities. Regulators charge that former Fannie executives overstate earnings by $11 billion.