Updated from 7:51 p.m. EDT

Under pressure from regulators,

Freddie Mac's

board asked Gregory Parseghian to step down as chief executive on Friday, just two months after he took the post at the mortgage finance firm.

The decision followed a special meeting Friday of Freddie's board about how to respond to a demand by regulators that Parseghian be cut loose. The board also decided to replace its longtime general counsel, Maud Mater, who has been out on an extended vacation. Parseghian will stay on as acting chief executive until a new top executive can be found.

Freddie's board was pressed into action because regulators were dissatisfied with its efforts to clean house after a major accounting blowup. Specifically, regulators were upset that Freddie promoted Parseghian even though he took part in many of the accounting games at the government-sponsored company.

"We want to thank Greg Parseghian for his outstanding contributions to this Company, first as Chief Investment Officer and most recently as our CEO," said Board Chairman Shaun O'Malley,

in a statement. "But after discussions with our regulator and Greg, we believe it is now in the interest of the company to accede to OFHEO's directive."

Armando Falcon, the director of the Office of Federal Housing Enterprise Oversight, which regulates Freddie Mac,

issued a statement Friday in which he said Parseghian and Mauter should be replaced.

While regulators at the OFHEO lack the power to force Freddie to fire anyone, sources said the agency can issue a finding that keeping certain employees on its staff is "unsafe and unsound." Such a finding would no doubt rattle investor confidence in Freddie, especially if the government-sponsored finance firm refused to act on the regulators' recommendations.

In June, Freddie's board tried to limit the damage done by the mortgage outfit's accounting scandal by moving quickly to oust three top executives, including former President David Glenn and Chief Executive Leland Brendsel.

Deck Chairs

Before the board's late Friday decision, analysts already were predicting that Parseghian was a goner.

"I think it would be very difficult for him

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Parseghian to stay in this position after these articles have come out," said Paul Miller, an analyst with Friedman Billings Ramsey. "It's ultimately a big positive for this company because for me you are cleaning the decks out. I feel that all the bad news will then be in the company." (Miller, who currently rates Freddie as an outperform, doesn't own shares of the company and his firm has no investment banking relationship with the company).

Yet even before OFHEO began pressing for changes, some shuffling of the deck is already taking place.

A Freddie spokesman confirmed that the company's former corporate controller, Greg Reynolds, left within the past few weeks. The spokesman declined to comment on whether Reynolds, whose most recent job was senior vice president for business development, had been fired or left voluntarily.

Additionally, Freddie had named an acting general counsel to take the place of Mater, the company's general counsel and executive vice president, who is on an extended vacation.

Rolling Stone

Several analysts said further management changes at Freddie seemed inevitable, after an internal investigation found that many current employees knew the company used a series of questionable accounting maneuvers to "manage" and "smooth out" its quarterly earnings since the beginning of 2000. The analysts speculated that the company may be trying quietly to oust some of its managers to avoid another sharp selloff in the stock.

Another reason to look for more management changes at Freddie is that OFHEO is under enormous pressure to take a tough stance with the finance firm.

Many on Capitol Hill are blaming the regulatory agency for failing to detect the accounting shenanigans at Freddie, and some are calling on Congress to abolish the agency. One of those is Rep. Richard Baker (R., La.), an outspoken critic of Freddie and its sister company,

Fannie Mae

. Baker introduced a bill that would empower the Treasury Department to oversee the two publicly traded companies, which are the biggest players in the U.S. mortgage market.

Sources familiar with the regulatory inquiry said one thing OFHEO was focusing on was the role played by the more than a dozen employees who are identified by name in the Freddie internal report, which was prepared by lawyers at Baker & Botts. That internal report found that many top-level managers at Freddie, including Parseghian, had approved a lot of the accounting maneuvers now under scrutiny.

Parseghian, formerly Freddie's chief investment officer, attended an important meeting at which Freddie Mac managers discussed establishing a series of "linked swaps," sophisticated transactions that ultimately were used to transfer approximately $420 million in operating earnings from 2001 into later years. Lawyers at Baker & Botts concluded Parseghian knew that some of the questionable accounting procedures were "an attempt to defer earnings" until future quarters.

The Baker & Botts report caused a lot of head-scratching on Wall Street because many had believed that the accounting games at Freddie were largely the work of the three executives forced out in early June. In fact, Parseghian's elevation to the top job at Freddie had been widely hailed on Wall Street, given his long career on the Street as an investment manager and bond analyst.

Merrill Lynch analyst Michael Hughes, in a research note on the Freddie scandal, said recently, "Parseghian could come under some pressure in the press and/or by regulators due to his knowledge of some of these transactions."

In the wake of the accounting scandal, a number of shareholder class-actions have been filed against Freddie. One of those lawsuits, filed by the West Virginia state pension fund, accuses Parseghian of improperly profiting from Freddie's accounting games because he sold shares valued at $2.7 million, while knowing the company was massaging its earnings.

Parseghian strenuously denied the allegation and said he has "nothing to hide."