Freddie Mac Boss Had Been Warned Four Years Ago

Freddie Mac, the mortgage firm that had to be rescued by the US government last month, was warned as early as 2004 that dubious loans were compromising its financial health.

Freddie's former chief risk officer, David Andrukonis, told the New York Times that he sent chief executive Richard Syron a memo in mid-2004 showing Freddie's underwriting standards were slipping and potential liabilities were widening.

He says he warned Syron at a meeting that the number of bad loans "would likely pose an enormous financial and reputational risk to the company and the country".

But, according to Andrukonis, the response was blithe: "He said we couldn't afford to say no to anyone."

Freddie and its sister firm, Fannie Mae, play a crucial role in the US financial system by guaranteeing nearly half of the country's mortgage debt.

A crisis of confidence erupted last month when it became clear they faced losses far higher than initially feared in the meltdown in US sub-prime home loans.

Shares in Freddie have fallen by 77% since the beginning of the year. In first-quarter figures due today, analysts expect Freddie to reveal up to $2bn (?1bn) in credit-related costs.

Syron, a former Federal Reserve policy adviser who joined Freddie five years ago, responded to Andrukonis's accusations with a measured acceptance of responsibility. "If I had better foresight, maybe I could have improved things a bit," he said. "But frankly, if I had perfect foresight, I would never have taken this job."

Executives at Freddie say they were under pressure from Congress to buy loans from low income families in order to facilitate broader access to home ownership.

Legislation was rushed through last month that allows the US government to buy shares in Freddie and Fannie and to extend them credit to prevent them from going bust. The nonpartisan congressional budget office estimated this could require $25bn of taxpayers' money.

Syron, 64, is due to stand down as chief executive once a successor can be found. Reports suggest that one candidate under consideration is the former Bear Stearns chief executive Alan Schwartz.