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Analysts Question Freddie's New CEO On His Role in
Deals By Kathleen Day and David Hilzenrath Wall Street stock analysts yesterday pressed Freddie Mac's new chief
executive, Gregory J. Parseghian, on why investors should trust him, given his
direct involvement in designing many of the deals that led to accounting errors
of as much as $4.5 billion at the McLean-based mortgage-funding giant. In a closed-door session for more than two dozen analysts at New York's Le
Cirque restaurant, several grilled Parseghian, asking whether he has enough
integrity to run the company and why investors should rely on his judgment after
his office handled trades intended primarily to meet Wall Street's profit
targets, according to analysts who attended the luncheon. "They were asking, in effect, 'Are you tainted?' " said Kenneth A. Posner of
Morgan Stanley. Paul Miller of Friedman, Billings, Ramsey Group Inc. in Arlington said, "His
answer was that some of these trades had marginal economic value, but that he
had relied on accounting advice that turned out to be wrong." Analysts described Parseghian as someone fighting for his job and the lunch
as his first attempt to, in the words of one, "come out swinging." A report to the board last month by the law firm Baker Botts LLP said
Parseghian was one of the executives who approved trading strategies that, among
other things, were designed to obscure the effect of an accounting rule and to
meet expectations of what was known as "steady Freddie" earnings growth. In his prepared remarks, Parseghian, who ran Freddie Mac's trading and
investment division until June, pledged to correct the company's financial
statements, build long-term shareholder value, improve public disclosure and
foster an open corporate culture. The company didn't release the details of his
question-and-answer session with the analysts. Posner, Miller and others said they were satisfied with Parseghian's
responses: that he said he got bad advice and that he never compromised the
underlying safety and soundness of the company's business. And despite helping
to execute the questionable trades, he told analysts he protested more than once
to executives and to the board that focusing on quarterly earnings targets was
inappropriate. "Did he defend his credibility successfully? Jury's still out, but I feel
better," Posner told clients in an e-mail after the luncheon. Analysts said some investors they speak to think Parseghian should step down
because his association with the manipulated earnings taints him. Other
investors think he must stay, however, because he built Freddie Mac's portfolio
of investments and knows it better than anyone, the analysts said. A lawyer for the company said the closed meeting didn't violate securities
rules about making material information public because Freddie Mac is exempt.
But Freddie behaves as if it was covered by the rules, the lawyer said. A
spokesman added that company lawyers were at the luncheon to make sure that any
material statements by Parseghian were made public. Among the highlights of Parseghian's remarks, analysts said, was a statement
that the company expects Congress to pass a bill transferring oversight of
Freddie Mac and its rival, Fannie Mae, to the Treasury Department. He also announced that that the company has hired former Securities and
Exchange Commission lawyer David Martin to help the company make sure it
complies with disclosure rules. Parseghian also repudiated the company's emphasis on reporting steady
earnings, the hallmark of his predecessor, Leland C. Brendsel, who was forced
out in June, along with President David W. Glenn, who was fired, and Chief
Financial Officer Vaughn Clarke, who resigned. "I want to emphasize that we are focused on creating long-term value for
shareholders, and not on short-term objectives, such as earnings targets. As
CEO, I will not compromise long-term value objectives for the sake of reducing
volatility in short-term earnings results," he said in his prepared remarks. Parseghian has declined most interview requests since being named chief
executive. Company spokesmen have said he was too busy running the company to
talk to the media. Sources close to the company said the board of directors also
felt that Parseghian needed to keep a low profile, even in the face of
criticism, until after being interviewed by federal investigators at the Office
of Federal Housing Enterprise Oversight, the agency that regulates Freddie. OFHEO investigators questioned Parseghian for nearly 12 hours on Monday,
sources said, and the company now plans a series of efforts to bolster
Parseghian's reputation on Wall Street and with the public. The SEC and the
Justice Department also are investigating the company.
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