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Remarks by
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| "I am fiercely determined to lead our great company to be the best at every thing we do. And we will do it in a manner marked by openness, transparency and candor." |
This mission defines Freddie Mac's business – who we are and what we are trying to accomplish. Our business model flows directly from our congressional charter, which requires us to focus exclusively on financing residential mortgages. I am personally committed to extending the benefits of our charter to more families and communities across the nation.
Freddie Mac also is focused on meeting the needs of underserved borrowers. It's no secret that minority homeownership rates are low, and, in my opinion, too low. That's why we are redoubling our efforts to serve these families and fulfill our commitment to President Bush to significantly expand minority homeownership by the end of the decade. Through a variety of new initiatives, and a significant mortgage purchase commitment, we are helping families overcome key barriers to homeownership, such as credit and down payment. We are also focused on combating predatory lending and ensuring that families can build wealth through homeownership.
Freddie Mac's mission has never been more relevant or important – and we can achieve it by being the premier financial institution. I am fiercely determined to lead our great company to be the best at every thing we do. And we will do it in a manner marked by openness, transparency and candor.
Now, let me describe my priorities for becoming the premier financial institution – and the kind of core competencies I'd like to see flourish at Freddie Mac.
Get Our Financial Statements Right
When I took this position, I told you that "Job One is getting our financial statements right." But this is only the beginning. Several months ago, we embarked on an ambitious remediation plan to address the issues that led to the need to restate earnings. My goal is for Freddie Mac to be recognized as the best in class for accounting, reporting, controls and financial disclosures.
We have recently sharpened the focus of this plan in light of the review conducted by the law firm of Baker Botts, which was hired by the Board to further investigate certain issues related to the restatement. Two weeks ago, the Board forwarded to the Company the results of the Baker Botts review, which was prepared by former SEC General Counsel Jim Doty.
The Baker Botts report raised serious concerns about the company's past accounting, controls and disclosure processes and practices. Addressing and correcting the issues identified in this report are top priorities for me. Key elements of that response include an action plan to correct every issue identified in the report, and a review and overhaul of the company's disclosure processes and practices. Specifically:
- I have directed CFO Marty Baumann to expand his remediation effort to ensure that each and every accounting policy and control issue identified in the counsel's report is addressed with an action plan to correct the deficiency.
- Second, we have retained David Martin, a partner at the law firm of Covington & Burling and the immediate past Director of the Division of Corporation Finance at the SEC, to work with management to benchmark the disclosure processes and practices of high–quality reporting firms – and replicate them at Freddie Mac. This process will enable us to make a seamless transition to an SEC reporting company that meets the full scope of SEC financial disclosure requirements, as we have committed to do. I reaffirmed our commitment to SEC registration in a letter to Treasury Secretary Snow on July 14, 2003.
As I hope you understand, I am taking the challenges very seriously. The extraordinary efforts we are making will ensure that Freddie Mac develops robust competencies in the areas of accounting practices, controls and financial disclosures.
Build Long–Term Shareholder Value
As steward of shareholder capital, my job is to deploy capital efficiently and to earn superior returns over the long term while effectively managing risk. That has been my business philosophy since the day I came to Freddie Mac. I have used that philosophy in growing our investment portfolio and the results speak for themselves. Now, I'm going to apply that same philosophy across our entire business.
Three core competencies are critical to our ability to build shareholder value: asset selection, risk management and low–cost financing.
First, asset selection is the process of evaluating mortgage debt outstanding and determining which assets meet our business objectives. It entails a superior understanding of all aspects of mortgages that affect their value, including cash flows, prepayment behavior and credit characteristics. Going forward, we are focused on maintaining a high–quality mortgage portfolio and ensuring that we are well positioned to participate in the broad array of products that characterize mortgage debt outstanding.
Second, superior risk management has been – and will continue to be – a core competency at Freddie Mac. Our highly disciplined approach to risk management is evident throughout our business – from our extremely low levels of credit risk in our single and multifamily business lines to the consistently narrow duration gap of our retained portfolio. Put simply, we are trying to generate superior returns while taking the lowest possible risk. Maintaining a laser–like focus on risk management will be a hallmark of this firm.
| "As CEO, I will not compromise long-term value objectives for the sake of reducing volatility in short-term earnings results." |
Recent market volatility has demonstrated the critical importance of effective risk management. Despite the tremendous rise in interest rates in recent weeks, Freddie Mac's duration gap remained very low. This demonstrates that in volatile interest–rate environments, our risk management framework is essential to protecting shareholder value. Very few institutions can claim such a strong risk position – one that I am determined to maintain.
I am similarly committed to maintaining our edge in the reporting of our risk exposures. In this time of great interest–rate volatility, Freddie Mac and Fannie Mae are the only two financial institutions that report our exposure to interest–rate risk on a monthly basis – metrics that are closely watched by market observers. To date, no other financial institution has joined us in making such a commitment to transparency.
A third core competency is low–cost financing. Freddie Mac's ability to lower the cost of homeownership for families is a direct consequence of our charter, our disciplined approach to risk management and the superior performance of our mortgage–backed and debt securities. Every day we strive to be the premier global non–sovereign credit, attracting low–cost funds from around the world to support homeownership in America. In this way, we enable homeowners to compete alongside the largest and most creditworthy institutions in the world for financing.
I want to emphasize that we are focused on creating long–term value for shareholders, and not on short–term objectives, such as earnings targets. As CEO, I will not compromise long–term value objectives for the sake of reducing volatility in short–term earnings results.
This business philosophy focusing on long–term value creation is a "new investment paradigm" for Freddie Mac – one that I have advocated in the past and will vigorously pursue going forward.
Disclose Effectively So that the Public Understands Our Business and Results
Our next priority is to ensure that you, as investors, fully understand whether we are fulfilling our objective of building shareholder value. To enhance investor understanding of our results, we will provide three sets of results: GAAP results, a non–GAAP supplemental measure and fair value. If we are successful at generating world–class risk adjusted returns on shareholder's capital, and I am confident we will, we will maximize earnings over the long term regardless of how they are measured. GAAP or other book–based measures and fair value are simply different ways of measuring economic results that, over time, will be the same.
GAAP will be the primary measure of our financial results. GAAP is important because it is the gold standard mandated for all public reporting companies as well as the basis of our regulatory capital requirements. Investors also need to understand the drivers of our GAAP results. Because of the different accounting treatment of economically similar instruments like callable debt and option–based derivatives, we expect to provide a supplemental, non–GAAP book–based measure to address this issue.
Fair value has been a topic of discussion since we announced on June 25 that we would begin providing a fair value balance sheet on a quarterly basis. Fair value represents the net marked–to–market value of all financial instruments. Over the long term, fair value closely reflects the underlying economics of our business. This measure will be particularly helpful in understanding our performance during the restatement period and the period immediately following.
Although all these measures are important, long–term value creation is the touchstone of our business philosophy. That's why we want to provide you fair value metrics more frequently than required by the FASB. Since I look at all three of these measures in evaluating Freddie Mac's performance – I believe you should have them, too.
Going forward, I am committed to ensuring that you have information on all three measures, so that, regardless of the way in which you choose to assess Freddie Mac, you will have a full understanding what we are trying to accomplish in our business. Once the restatement is complete, I will be back to give you a complete explanation of our results and capital position.
Foster an Open Culture
The Baker Botts Report confirmed something that many of you have believed for a long time: Freddie Mac has had a culture that was inwardly–focused. I hope that many of you believe as I do, that our June 25 press release marked the beginning of a new era of open communication. As difficult as it was, I am proud that, when there was bad news to communicate, you heard it from me first. You are going to hear it from us straight – whether we have a great year or a bad year – and we're going to tell you why it happened.
We also intend to be more outward facing in the way we do business. We're going to talk to and – more importantly – listen to our investors, customers, business partners and employees. In the brief time that I have been CEO, I have been really pleased with the response I have gotten by simply picking up the phone and talking to people. I am confident that we have a huge opportunity to build durable and profitable business partnerships across our industry that will enhance our ability to serve homeowners and renters.
Conclusion
In closing, let me say that Freddie Mac has a bright future. To fulfill our mission, I have set my sights on making Freddie Mac the premier financial institution in the world. To reach this goal, I am focused on four key priorities, which are to get our financial statements right, to build long–term shareholder value, to disclose effectively so that the public understands both our business and our results, and to foster an open culture.
We will continue to build on our three existing core competencies of asset selection, risk management and low–cost financing, which are critical to our ability to build shareholder value. And we are working very hard to develop the fourth core competency in the area of accounting, control and financial disclosures.
We have a mountain of work in front of us. But I am excited about the potential of Freddie Mac – a great American company with a great mission.
I know you have questions and I am here to answer them. Your observations and insights make us a better company, and I welcome our give and take because we can always learn something from each other. Thanks for your time and attention and let me open it up to anything you want to discuss.
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| © 2008 Freddie Mac |
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