Risk at Freddie Mac Case Solution
The U.S. government didn't expressly back Freddie Mac, a stockholder-owned organization, but investors were said to see some degree of implied government approval. To smooth gains in a changing rate of interest environment, Freddie Mac prided itself on modeling, measuring, and handling interest rate risk and credit. Significant resources were devoted to developing solutions and complex, quantitative risk modeling. Interest rate risk was reduced mainly through the use of interest rate swaps and swaptions.
The motivation to smooth gains was constitutional in Freddie Mac's culture and caused business difficulties: The businesses (e.g., accounting, audit, etc.) of the organization were not well supported, executive compensation was tied to meeting earnings estimates, and employees involved in developing creative accounting alternatives to handle earnings were thought of as "first class." During the initial stages of 2003, Freddie Mac declared that it would show its earnings for 2002, 2001, and perhaps 2000 again. OFHEO decided that Freddie Mac had discounted operations risk management when managing interest rate risk and gains, leaving room for accounting and disclosure issues. How should investors view the events leading to Freddie Mac's management of interest rate risk and operations risk and the $5 billion restatement?
PUBLICATION DATE: December 01, 2004 PRODUCT #: F270-HCB-ENG
This is just an excerpt. This case is about LEADERSHIP & MANAGING PEOPLE
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