Freddie's Killer Parking Space

A legal report accompanying its restatement says it helped a banker out of a jam.
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There's no parking on Wall Street.

The law applies to cars and securities -- in the case of the latter, prohibiting the practice of disguising the true owner of an asset, usually as a way to spruce up a balance sheet. It was part of

Enron's

motive in dozens of convoluted special purpose entities and circular prepaid oil and gas deals with

Citigroup

(C) - Get Report

and

J.P. Morgan Chase

(JPM) - Get Report

.

Now it appears that

Credit Suisse First Boston

, one of Wall Street's biggest investment banks, might have been involved in some asset-parking with the help of

Freddie Mac

(FRE)

. While nobody appears to have broken the law, the allegations in a report released Friday by Baker & Botts, the law firm that looked into the accounting mess, raise some questions about how cozy relationships sometimes get on Wall Street.

The Baker & Botts report came the same day Freddie finally released the results of a long-awaited restatement that's supposed to rectify three years worth of accounting errors.

And while it's the restatement that's making most of the headlines, the Baker & Botts report may be of more significance, because it sheds light on thecozy relationship that often exists between Wall Street banks and big clients like Freddie and its larger sibling

Fannie Mae

(FNM)

.

The lawyers found possible evidence of asset-parking in a series of mortgage-backed securities trades between CSFB and Freddie in July 2002. Inthe deals, CSFB sold $8 billion in mortgage-backed securities to Freddie. At the same time, the

Credit Suisse Group

(CSR)

division promised to buy back a similar amount of mortgage securities at a future date. CSFB also said it would protect Freddie against any prepayment risk on those securities.

An unidentified CSFB trader who arranged the deal said the investment bank needed to do the transaction because he had "$9 billion in balance sheet

sic" he wanted to "get rid of." The trader told officials in Freddie's fixed-income trading division that "CSFB simply does not have the balance sheet available to carry all that they are long."

The reference wasn't more specific, but it probably refers to the company's ability to hold the securities while maintaining an appropriate leverage ratio.

Baker & Botts found no evidence of wrongdoing on Freddie's part in the transaction. The law firm said there was no evidence that Freddie entered into the deal in order to manage its earnings. The lawyers also said they found no evidence that Freddie had "aided and abetted a securities law violation by CSFB." But the lawyers noted that its inquiry was limited, and it did not make any inquiries of CSFB.

Still, the lawyers noted that at least one Freddie accountant was concerned enough about the "possible appearances surrounding" the deal totell a trader not to engage in a similar transaction again.

For its part, CSFB denied any wrongdoing in the transaction, and it described it as a "standard financing technique in the mortgage business."A bank spokesman said, "Any implication that this transaction was a 'parking' transaction is wholly inaccurate and misinformed."

The Baker & Botts report leaves out that Gregory Parseghian, Freddie's soon-to-be replaced chief executive, is a former CSFB managing director. Parseghian also was the head of Freddie's fixed-income group at the time the deal was arranged.

The report also makes no mention of the fact that CSFB ranks seventh on Wall Street in terms of managing investment banking deals for Freddie,according to Thomson Financial.

In August, regulators at the Office of Federal Housing Enterprise Oversight ordered Freddie's board to remove Parseghian after an earlier Baker & Botts report found that Parseghian had approved some of theaccounting maneuvers used by Freddie to deliberately massage its earnings and shift some profits into the future. This past summer, the board turned to Parseghian to clean up the mess at Freddie, after the company had to dump its top three executives when the accounting scandal broke in June.

It's not known what the regulators at OFHEO, the

Securities and Exchange Commission

and federal prosecutors -- all of whom are investigatingFreddie's accounting woes -- will make of these latest allegations. The agencies declined to comment.

OFHEO, however, previously has said one of the things it's looking into is the role Wall Street banks, such as

Morgan Stanley

(MWD)

, Citigroup and

Goldman Sachs

(GS) - Get Report

, may have played in Freddie's accounting games. All three Wall Street firms rank among the top investment banks Freddie turns to for managing bond and debt offerings.

But this longstanding cozy relationship between Freddie and the Wall Street banks may explain why two-thirds of the research analysts who followthe company rate its stock as either a buy or a strong buy, even with all the pending investigations and unresolved questions about its accounting.