Updated from 2:24 p.m. EDTFederal prosecutors and securities regulators have both opened investigations into Freddie Mac's ( FRE) accounting, raising the ante in what increasingly looks like a nightmare scandal for the company's shareholders. Word of the expanding investigations comes just two days after a major management shake-up at Freddie, which included the firing of its president, David Glenn, and resignation of two other top executives. Glenn was fired for failing to cooperate with an internal investigation at Freddie and allegedly altering pages and notations in several personal diaries he kept about the mortgage firm's business activities. The internal investigation began after the McLean, Va., company announced in January it would have to restate earnings for the past three years. Virginia U.S. Attorney Paul McNulty, in a brief public statement, confirmed Wednesday that his office had opened a criminal investigation. He declined to elaborate. Freddie, meanwhile, released a statement saying it had been notified Tuesday evening that the Securities and Exchange Commission had begun a formal investigation of the mortgage market maker. "We have not been contacted by the U.S. Attorney," said David Palombi, a Freddie spokesman. "But if contacted, we will cooperate."
TV CamerasCongress also is looking to get in on the act. Rep. Richard Baker (R-La.) said his House Financial Services subcommittee intends to hold hearings on the Freddie mess. The turmoil at Freddie is providing ammunition to congressional critics of Freddie and its close cousin, Fannie Mae ( FNM), who believe the two government-sponsored companies need greater regulatory oversight. Freddie and Fannie are critical players in the mortgage market. They buy mortgages issued by banks, package them and sell bonds backed by the mortgages to investors. It's believed federal prosecutors and regulators are looking into some of the accounting procedures Freddie has used to value its derivatives transactions. Freddie relies on derivatives to hedge its exposure to interest rate fluctuations.