Scandal threatens US housing market

The crisis threatening Freddie Mac, the mortgage financier that plays a crucial role in the US housing market, deepened yesterday when a criminal investigation was launched into the company's accounting.

The inquiry, led by Virginia US attorney Paul McNulty, follows the abrupt departure of Freddie Mac's three most senior executives this week and the admission that the company needs to restate earnings going back to 2000.

The securities and exchange commission, the US financial regulator, has also opened a formal inquiry into the accounting irregularities.

The growing scandal threatens to destabilise the housing market, one of the few areas of the American economy to have thrived through the downturn of the past three years.

Freddie Mac and rival Fannie Mae, created by the US government in 1970 to provide financing to lenders and encourage home ownership, together own or guarantee 42% of the $6 trillion (£3.6 trillion) US mortgage market.

They buy mortgages from lenders and then package them into securities which they sell to investors.

There have been increasing concerns about the regulation of Freddie Mac and Fannie Mae, which sell securities with an "implied" government guarantee. Federal Reserve chairman Alan Greenspan, who has voiced concerns over their liquidity, on Tuesday questioned why the two companies have lower levels of disclosure than other stock market-listed firms.

Freddie Mac said it was not yet aware of the criminal investigation. In a statement chair man Shaun O'Malley said the company would "continue to cooperate" with the SEC.

He added that internal reviews had still not uncovered any inappropriate behaviour except for that of former president and chief operating officer David Glenn, who was fired on Monday. Mr Glenn allegedly altered his diaries to hinder an investigation into the restatements.

Chief executive Leland Brendsel and finance chief Vaughn Clarke also resigned on Monday.

The restatement will give Freddie Mac higher earnings for the three years in question but will sap future profits. The problems have arisen from the way the company accounts for derivatives. The firm will bring forward the recognition of profits from the instruments, which effectively bet on future events.