Washington (July 22, 2003) -- Freddie Mac's accounting standards will come under congressional scrutiny Tuesday, as a House subcommittee launches a probe into the growing scandal.

Rep. Cliff Stearns R-Fla., chairman of the Commerce Trade & Consumer Protection Subcommittee, scheduled a hearing Tuesday to examine the accounting standards used by the Federal Home Loan Mortgage Corp. and its compliance with Generally Accepted Accounting Principles.

"I am concerned that complex financial accounting standards, such as those addressing derivatives and hedging activities, as applied, are producing different pictures of companies' economic well-being when those companies are essentially in the same line of business," said Stearns in a statement.

Freddie Mac, which sells mortgage-backed securities to investors, has recently come under the microscope of federal regulators. The entity has become the subject of an ongoing investigation as a result of its having to restate its earnings by up to $4.5 billion.

Freddie Mac generates revenue from a favorable “spread” between mortgage-backed securities and the debt it issues to buy those assets, largely via the use of hedging and derivatives.

Since the investigation, both Freddie Mac president David Glenn and former chief financial officer Vaughn Clarke have left the company.

Stearns pointed out that the standard for accounting for derivative instruments and hedging activities roughly 800 pages long. He urged the Financial Accounting Standards Board to “consider revisiting its approach to standard setting with an eye towards simplicity and consistency."

Those expected to testify at the hearing include Marty Baumann, executive vice president, Freddie Mac; Leslie Seidman, FASB; Peter Wallison, American Enterprise Institute; and Dr. Thomas Linsmeier, Eli Broad College of Business, Michigan State University.

Later this week Treasury Secretary John Snow is scheduled to testify before the House Financial Services Committee and recommend that the Treasury Department assume oversight of both Freddie Mac and its sister company, Federal National Mortgage Association (Fannie Mae). Both are now regulated by the Office of Federal Housing Enterprise Oversight.

-- WebCPA staff

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