Parseghian, Gregory J. ca. 1961–
Gregory J. Parseghian
Former chairman, Federal Home Loan Mortgage Corporation
Born: ca. 1961, in Philadelphia, Pennsylvania.
Education: University of Pennsylvania, BS; MBA, c. 1982.
Family: Son of John Parseghian; married; children: two.
Career: Credit Suisse First Boston, 1987–?, managing director; BlackRock Financial Management, partner; Salomon Brothers, ?–1996, managing director; Federal Home Loan Mortgage Corporation (Freddie Mac), 1996–2003, senior vice president and chief investment officer; chief executive officer, 2003–.
Awards: Ranked first on Institutional Investor magazine's fixed-income and mortgage strategy polls, six times.
■ Gregory J. Parseghian became head of the Federal Home Loan Mortgage Corporation (Freddie Mac), the publicly traded, U.S. government-chartered, guaranteed-mortgage and lending institution, in a management reshuffling in June 2003. The previous head, Leland Brendsel—along with chief operating officer David Glenn and chief financial officer Vaughn Clarke—resigned on June 9 at the board's request because of revelations of accounting problems that had underreported the company's profits. Parseghian lasted two months in his new position before pressure from the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Freddie Mac and its sister organization, Fannie Mae, and the Securities and Exchange Commission (SEC) persuaded the board to replace him as well. The law firm of Baker Botts LLP, hired by Freddie Mac's board of directors to investigate the financial problems, determined that the company had been changing its records solely to improve its standing with investors. On August 22, 2003, Parseghian departed under a cloud, having been tainted by the same accounting irregularities as his predecessors.
PROBLEMS AT FREDDIE MAC
Parseghian's departure from the leadership of Freddie Mac was significant because of the institution's standing as a government-sponsored enterprise (GSE). Freddie Mac was created in 1970 by the U.S. government as a means of putting home ownership and rental housing in the hands of people who could neither afford nor qualify for conventional mortgages. The corporation made funding available to lenders, bought mortgages and mortgage-related securities, and paid for them by putting securities and debt instruments in capital marketplaces. By doing this Freddie Mac helped keep mortgage rates down and maintained a stable American home-lending system. "Over the years," explained a press release located on the corporate Web site, "Freddie Mac has opened doors for one in six homebuyers and more than two million renters in America" (December 7, 2003).
At the same time, however, Freddie Mac differed from other publicly traded lending institutions because stockholders believed that its loans were underwritten by the U.S. Treasury. The corporation also had special advantages given to it, known as the "implicit guarantee," because of its status as a quasi-governmental organization. Freddie Mac paid no state or local corporate income taxes. Its securities could be used as collateral for loans. Should the institution fail because it made too many risky or bad loans, which nearly happened to Fannie Mae in 1981, investors expected that the government would intervene to protect the corporation, using public money if necessary to protect their investments. In fact, at one point the charters for Freddie Mac and Fannie Mae stated specifically that the U.S. Treasury maintained a line of credit for the institutions so that it could finance $2.25 billion dollars worth of debt. In essence, the federal government guaranteed Freddie's debt, and Freddie helped keep the market stable and provided low-cost loans for low-income families to buy houses.
Freddie's problem was that its public-service duties conflicted with the interests of its stockholders. In order to maximize their own profits, stockholders encouraged Freddie's management to take risks that other corporations would not dare to take. Freddie Mac and Fannie Mae together maintained a debt load that, according to Jason Thomas in a report on the U.S. Senate's Republican Policy Committee's Web site, was worth almost 40 percent of the entire U.S. public debt in 2003. The two corporations together also had financial assets at that time worth about 44 percent more than the assets of the largest U.S. bank, Citibank. "The scandal at Freddie Mac," Thomas stated, "is a direct product of a strategy, well underway at both firms, to leverage their 'implicit guarantee' to accumulate larger and larger mortgage investment portfolios and increase returns to shareholders" (September 9, 2003). In other words, because stockholders believed that the risks the corporation took fell not on the stockholders themselves, but on U.S. taxpayers, they pressed Freddie Mac's managers to take greater risks, assume greater debts, and make more loans than corporations without the backing of the U.S. government could possibly do. In some ways, stated Bill Mann on the Motley Fool Web site, the "implicit guarantee" gave Freddie and its big sister Fannie monopoly status in the mortgage-lending business.
Gregory Parseghian came to Freddie Mac in 1996 with a reputation he had already earned as a successful bond trader. His early career was spent in banking and financial services firms in the private sector, including Credit Suisse First Boston, BlackRock Financial Management, and Salomon Brothers. He joined the GSE in 1996, working as a senior vice president in investing. He earned a reputation as an aggressive, risktaking trader in 1998, when Russia repudiated its debts. Parseghian responded to the financial crisis by instructing his buyers to purchase mortgage bonds held by the hedge-fund corporation Long Term Capital Management. In the last quarter of 1998 Parseghian oversaw the acquisition of about $38 billion in mortgage bonds alone.
When the market for these bonds recovered in 2002, Freddie Mac earned big profits for its stockholders, but not for the American public, who underwrote the risks involved. The profits, however, disturbed Freddie Mac's planned performance reviews. The accounting company that audited Freddie Mac, Arthur Anderson LLP, the same firm that helped Enron Corporation conceal its true financial position, suggested changing the books to underreport the amount received. That income could be reported later in the year, to smooth out Freddie Mac's earnings and help it keep the nickname it had earned over the previous forty-odd years, "Steady Freddie." The reality of the company's practices increased shareholder value, but at the cost of increased volatility in the market, something that Freddie Mac, as a quasi-federal institution, was supposed to help suppress.
Arthur Anderson was not the only firm involved in concealing Freddie Mac's earned income until a future date. Two banks that also traded on the New York Stock Exchange, CSFB and Goldman Sachs, helped hide assets from one year to the next. According to Bill Mann of the Motley Fool Web site, Goldman Sachs alone was responsible for creative accounting that put away $400 million in 2001 earned income to a different year. Other companies, including Microsoft and General Electric, had in the past also resorted to creative accounting to smooth out their earnings and increase their ratings on the stock exchange. Although the practice had been widely condemned, it had not been made illegal.
Further investigations indicated that corporate management had underreported the company's income by as much as $5 billion averaged over the previous three years, 2000 through 2002. This was despite the fact that in 2001 management actually overstated the company's earnings by nearly $990 million. "Traders in Mr. Parseghian's unit who were executing the deals," explained the Wall Street Journal, "acknowledged they were involved in an accounting gambit that might draw criticism if it surfaced publicly" (June 11, 2003). Employees were warned to keep the news about the underreporting quiet in order to preserve the company's conservative reputation. After the scandal broke in June 2003, three of the top executives at Freddie were forced to resign. Their practices had threatened the stability of the entire mortgage market in the United States in order to keep their rates of growth high, benefiting stockholders and generating bonuses for the corporate executives.
Parseghian was appointed to the head position in the company that same June after the former chairman, Leland Brendsel, left the company under the cloud of those accounting irregularities. Before that he had managed Freddie Mac's entire loan portfolio, worth an estimated $600 billion. Company sources portrayed Parseghian as a relatively innocent insider, one who knew the markets (and therefore could calm Wall Street worries about Freddie's future) but at the same time who opposed the practice of managing earnings. From the beginning of his tenure Parseghian openly expressed his intention to create perfect financial clarity in the ongoing audit of Freddie's accounts and practices. In an interview with Janet Reilley Hewitt published in the industry magazine Mortgage Banking, he declared that among his chief aims as Freddie's head were to institute new accounting practices and deliver "accurate, comprehensive restatement results to the financial community" (August 2003).
Yet Parseghian was himself tainted by the accounting scandal, and the people who appointed him knew it. In July, only one month after Parseghian had been selected, the law firm Baker Botts LLP released a report explaining the irregularities. Baker Botts's officials had been among the people who had examined Parseghian before he was appointed and pronounced him fit to hold the post of chairman. However, in the report issued by the law firm, Parseghian was fingered as someone who either knew, or should have known, about the manipulation of information provided to shareholders. Jerry Knight, writing in the Washington Post, succinctly identified the central issue in the controversy surrounding Parseghian's role: "How can an executive who knew of and participated at least peripherally in efforts to mislead investors restore Freddie's credibility?" (September 1, 2003).
QUESTIONABLE STOCK SALES
Compounding the problem were stock sales Parseghian had made in January 2001 and June 2002. A lawsuit filed in West Virginia in August 2003 accused the executive of profiting inappropriately from the sales of these stocks because he had been at the time in possession of information about the company's improper accounting records. After news about the underreporting emerged, Freddie's stock dropped over 20 percent, and the executive profited by about $3 million. Parseghian argued that the stock sales had been arranged weeks in advance and were a direct result of the compensation agreement he had signed when he first joined the company in 1996. At that time he was provided with stock options that vested after five years, in his case, January 31, 2001. When he signed his new contract in 2001, Parseghian explained, he was given further options that vested in June 2002 and in 2005. It was the sale of these vested stocks that gave his actions the appearance of insider trading, an illegal activity. In fact, the executive declared, he had done nothing either illegal or wrong.
Among the casualties of the creative accounting measures was the trust that had been placed in Freddie Mac's board of directors and OFHEO, the federal office charged with regulating the safety and soundness of Freddie's activities. Hoping to quell stock market fears, Freddie's board announced Parseghian's appointment without first investigating his possible involvement in the accounting issue. Parseghian was an insider with a proven record of achieving growth, and by naming him the successor to Brendsel the board hoped to keep the company's profitability in the stock market. It was only after OFHEO pressured the board that it finally asked Parseghian to step down.
At the same time the OFHEO had, critics complained, been lax itself in allowing the board to appoint Parseghian in the first place. Freddie's lack of accountability, its freedom to maintain debt-to-credit ratios that other banks were not allowed to match, and its tax breaks were also cited as contributing to the problem. As a result, three Republican senators—Chuck Hagel of Nebraska, John Sununu of New Hampshire, and Elizabeth Dole of North Carolina—introduced legislation to take the OFHEO's function away from the department of Housing and Urban Development and turn it over to a different office, the Office of Federal Enterprise Supervision, in the Treasury Department. Similar bills were introduced in the House of Representatives and the Senate at the same time. All of these bills took the lack of oversight of the GSEs seriously and recommended steps to bring Freddie and Fannie's behavior more in line with that of other, privately held institutions. Some sponsors of bills recommended that Freddie and Fannie be totally privatized in order to relieve the Treasury from the responsibility of underwriting their debts and to keep taxpayers from having to bail out the companies in case of a failure.
AFTERMATH FOR PARSEGHIAN
Parseghian emerged from the scandal without his job but with his reputation largely intact. Although company documents showed that in 2001 he had signed onto a plan, with other executives, to recalculate the values of some of Freddie Mac's contracts, in general his fellow professionals felt that he was doing his job. He was being held accountable for practices that, in a less politically charged company, would never have been revealed in the first place. In December 2003 the outsider Richard Syron replaced Parseghian as chairman and CEO. Freddie's lead director, Shaun O'Malley, expressed the board's gratefulness to Parseghian for developing Freddie Mac's "premier risk management strategies and capabilities that remain today as the core of the company's safety and soundness regimen" (December 7, 2003).
See also entry on Freddie Mac in International Directory of Company Histories.
sources for further information
Barta, Patrick, "Leading the News: Freddie Mac CEO Defends Stock Sales," Wall Street Journal, August 18, 2003.
Barta, Patrick, and Gregory Zuckerman, "New Top Officer at Freddie Mac Praised as Pro," Wall Street Journal, June 11, 2003.
Barta, Patrick, John D. McKinnon, and Gregory Zuckerman, "Freddie Mac Ready to Oust CEO over Role in Accounting Scandal," Wall Street Journal, August 22, 2003.
"Finance and Economics: Off with Another Head: Freddie Mac," Economist, August 30, 2003, p. 61.
"Freddie Mac Board of Directors to Replace Chief Executive Officer," Freddie Mac, August 22, 2003, http://www.freddiemac.com/news/archives/corporate/2003/parseghian_082203.html.
"Freddie Mac Loses Another Chief Exec as Falcon Gives Verdict on Parseghian," Euroweek, August 29, 2003, p. 1.
"Freddie Mac Names Richard Syron Chairman and Chief Executive Officer," Freddie Mac, December 7, 2003, http://www.freddiemac.com/news/archives/corporate/2003/syron_120703.html.
"Freddie Mac Ousts Parseghian amid Accounting Errors," Bloomburg.com, http://quote.bloomberg.com/apps/news?pid=10000103&sid=aVMfxDwrERwk&refer=us
"Freddie Ousts CEO," GSE Report, August 25, 2003, http://www.gsereport.com/2003/July%2029%20-%20August%2025.pdf.
Hewitt, Janet Reilley, "Meet Freddie's New CEO," Mortgage Banking, August 2003, p. 55.
Knight, Jerry, "The Next Dramatic Exit at Freddie Mac Should Be O'Malley's," Washington Post, September 1, 2003.
Lofton, LouAnn, "Our Take: Freddie's New Head(ie)," Motley Fool, December 8, 2003, http://www.fool.com/News/mft/2003/mft03120813.htm.
Mann, Bill, "Our Take: Freddie Mac's Summer of Love," Motley Fool, September 26, 2003, http://www.fool.com/News/mft/2003/mft03092613.htm.
——, "Our Take: Freddie Smack," Motley Fool, November 21, 2003, http://www.fool.com/News/mft/2003/mft03112109.htm.
——, "Our Take: Knife the Mac," Motley Fool, August 25, 2003, http://www.fool.com/news/mft/2003/mft03082503.htm.
O'Malley, Shaun, "Chairman Supports CEO in Letter to The Washington Post," http://www.freddiemac.com/news/in_the_news/omalley_letter.html.
Parseghian, Greg, "Freddie Mac CEO Greg Parseghian Comments on Stock Trades," Freddie Mac, August 15, 2003, http://www.freddiemac.com/news/archives/corporate/2003/parseghianstocktrade_081503.html.
"Prepared Remarks: Greg Parseghian, CEO and President, Freddie Mac," Freddie Mac, August 18, 2003, http://www.freddiemac.com/speeches/parseghian/gp081803.html.
Sonnenfeld, Jeffrey, "Hit the Road, Mac," Wall Street Journal, August 26, 2003.
Thomas, Jason, "Problems at Freddie Mac and Fannie Mae: Too Big to Fail?" U.S. Senate Republican Policy Committee, September 9, 2003, http://rpc.senate.gov/_files/bk090903.pdf.
—Kenneth R. Shepherd