Once again, a corporate board has fumbled its response to a major scandal.

This time it's

Freddie Mac's

directors who are wiping egg from their faces, after regulators forced the mortgage finance firm to oust newly appointed Chief Executive Gregory Parseghian and longtime general counsel Maud Mater.

Freddie's board misjudged the reaction of regulators and some investors to its decision in June to promote Parseghian, who had been the company's chief investment officer. The board promoted Parseghian even though sources say it knew an internal investigation would reveal he had a hand in orchestrating some of Freddie's accounting games.

Bad Wager

Freddie's board gambled that Parseghian would be able to weather the storm because of the respect he had gained on Wall Street from his prior work as a bond analyst and investment manager. The board also was determined to use the accounting scandal as an opportunity to promote someone that many had long seen as heir apparent.

But in the post-

Enron

world, it appears that the best way for a board to deal with a corporate scandal is to simply wipe the decks clean and bring in a whole new management team.

"They really should have brought someone in from the outside," said Paul Hodgson, a senior researcher for the Corporate Library, a corporate governance advocacy group. "What they should not have done is made any permanent appointments until the report was finalized and then they could have avoided this situation completely."

The response from investors to news that Parseghian will be shown the door was positive. Shares of the nation's second-biggest mortgage buyer rose $2.19, or 4.4%, to $51.66 on Monday.

Still Sweeping

In fact, the housecleaning at Freddie may not be over. Sharon McHale, a Freddie spokeswoman, said "a process is under way to review" the role other employees may have played in the company's inappropriate accounting maneuvers. She said other employees could be asked to leave the company in the coming weeks.

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The irony is that just three months ago, many on Wall Street were hailing the decisive action taken by Freddie's board in the wake of the accounting scandal at the nation's second-largest mortgage buyer. The company had appeared to move quickly to limit the damage by pushing out three top executives, including former President David Glenn and Chief Executive Leland Brendsel, and naming Parseghian to the top post.

But the cheers turned to jeers in late July after an internal report commissioned by Freddie's board revealed that Parseghian knew the government-sponsored company was trying to "manage" and "smooth out" its quarterly earnings. To make matters worse, Shaun O'Malley, Freddie's chairman, staunchly defended the board's decision, repeatedly calling Parseghian "the right man for this job."

Strong Advice

Regulators at the Office of Federal Housing Enterprise Oversight, meanwhile, felt differently and last week urged Freddie's board to oust Parseghian and look outside the company for a new chief executive.

Indeed, some believe that's what Freddie's board should have done from the outset. If the board had wanted to continue to make use of Parseghian's talents, it could have named him a temporary chief executive while it began the search for a permanent replacement.

Even with Monday's gain, Freddie's shares still are trading 15% below their price on the day the accounting scandal broke in early June. The board's mishandling of the Parseghian hiring only served to provide more ammunition to the 18 class-action lawsuits that have been filed against the company in the scandal's wake.

Moreover, even with Freddie's belated cleansing, its problems aren't over.

The company next month will report the results of its much-anticipated restatement, which is intended to rectify its prior accounting errors. The company has said the restatement could add anywhere from $1.5 billion to $4.5 billion to its past earnings, but also reduce future earnings at the mortgage firm.

Most of the accounting games at Freddie stemmed from an attempt by management to limit the impact of its large derivatives portfolio on its earnings. Rather than record large gains on those derivatives transactions in a short time frame, Freddie's managers tried to spread out those revenue gains over a several-year period.

With such a wide range in estimates for the final price tag of the restatement, many on Wall Street are waiting to see the nitty-gritty details before rendering a judgment on Freddie's stock.

Additionally, the

Securities and Exchange Commission

and federal prosecutors are conducting their own investigations.

All of that adds up to several more opportunities for Freddie's board to wind up getting egged again.