In the early years of the 21st century, accounting scandals usually involved major private organizations such as Enron. However, all that changed when Federal Home Mortgage Corporation (also called Freddie Mac), the second largest financer of mortgages, came under the microscope of the authorities including the United States Justice System. The SEC believed that Freddie Mac had irregularities in its accounting procedures, and therefore, decided to investigate the mortgage giant. Freddie Mac was a government sponsored organization that came into being in the year 1970. The organization was set up to promote home-ownership, and, at first, Freddie Mac functioned very well. The corporation successfully promoted investments and home ownership. However, in the years that followed, the company was accused of deferring a part of its income in order to make future forecasts look attractive. The company used accounting tricks to lead shareholders to believe that the risky investments it had made were profitable, and misstated its earning by around 5 billion dollars. However, the truth was a far cry from what was shown, and a huge investigation ensued. In the investigation that followed, three of the top executives at Freddie Mac were replaced, and the company was fined heavily, paying 125 million dollars as civil fine in 2003. Yet, the scandal highlighted the malpractices and glorified statuses such companies enjoyed. (Freddie Mac Scandal, 2014)
The scandal that happened at Freddie Mac shocked Wall Street, a place where the company had enjoyed a very good reputation. In addition, Freddie Mac lost billions of dollars (around 360 billion), in the subprime mortgage crisis that occurred late in 2008. The organization had to be then helped by the US government, which was left to pick the ruins. The US government knew that something had to be done about Freddie Mac, and in 2008, the company's stocks were removed from the New York Stock Exchange. The scandal also had a long lasting effect on the financial market, and the government soon realized that sponsored entities were misusing their power and underperforming. Therefore, there was the belief that increased government control was required, control that would allow the government to keep a steady check on the performance of such companies, and preventing subprime mortgages from happening again.
It is safe to say that Freddie Mac has an uncertain future ahead of it. It has made a host of changes to its mortgage policies, changes that were made in the years after the scandal. The corporation is careful about whom it provides mortgage loans to, and the risk factor has been taken down considerably. This has enabled Freddie Mac to boost its earnings, and the company reported earnings of $10.8 billion in 2012. In addition, in a move that is sure to calm taxpayers, Freddie Mac has been working hard to repay the $72 billion capital investment it received from the US Treasury. By May 2013, the corporation had paid back $30 billion. In a change that was made in 2012 though, Freddie Mac agreed to pay its profits to the US government.
Works Cited
What's The Future for Freddie Mac And Fannie Mae? A Small Finance Company In Boston May Have The Answer. (n.d.). International Business Times. Retrieved February 27, 2014, from http://www.ibtimes.com/whats-future-freddie-mac-fannie-mae-small-finance-company-boston-may-have-answer-141085
Freddie Mac scandals began during Emanuel's watch. (n.d.). chicagotribune.com. Retrieved February 27, 2014, from http://www.chicagotribune.com/news/local/chi-rahm-emanuelmar26,0,1946702.story
What Are the Origins of Freddie Mac and Fannie Mae?. (n.d.). History News Network. Retrieved February 27, 2014, from http://hnn.us/article/1849
