A top-tier shakeup at Freddie Mac ( FRE) rattled financial markets Monday as government regulators signaled that they are stepping up an inquiry into the company's accounting. Some observers argued the changes are long overdue, however, and said that ultimately they will help the company. Out at Freddie Mac are David Glenn, the company's president and chief operating officer; Leland Brendsel, Freddie's chairman and chief executive; and Chief Financial Officer Vaughn Clarke. Glenn was fired, and Brendsel and Clarke resigned. The nation's second-largest buyer of home mortgages said Glenn's firing was prompted by "serious questions" about his cooperation with the company's internal audit review of past earnings, which has been going on since the beginning of the year. The company said Glenn maintained his own personal diary of events at Freddie and may have altered some of those entries. The alleged misconduct was first discovered by Freddie Mac on June 4, sources say. The internal investigation was being led by Freddie's audit committee, headed by Tom Jones, a top Citigroup executive.
The McLean, Va.-based company announced the management changes before the start of the trading day, but only after receiving a letter Friday from regulators saying they're "increasingly concerned" about allegations of "employee misconduct" at Freddie Mac. Regulators at the Office of Federal Housing Enterprise Oversight informed Freddie Mac on Friday that it is sending a "special team to investigate" the ongoing audit review. The OFHEO released a copy of the letter on its Web site. The news sent the stock careening lower. In midday trading it was down $10.07, or 17%, to $49.80. The bad news at Freddie also weighed heavily on its main peer, Fannie Mae ( FNM), which saw its stock fall $3.38, or 4.5%, to $71.56. Freddie's bad news also pushed down the stocks of homebuilders, probably on the assumption that trouble in the mortgage business will be bad for home construction. Many homebuilders fell between 2% to 3%. Some of the hardest hit stocks were Beazer Homes ( BZH), Hovnanian Enterprises ( HOV), KB Home ( KBH) and Pulte Homes ( PHM). Other financial stocks also fell on Monday as investors worried about the impact of the news on the bond market. Freddie and Fannie, government-created entities, are important players in fixed income because they issue guarantees on mortgage-backed securities sold to investors.