Prepared Remarks
Greg Parseghian
CEO and President of Freddie Mac
Equity Lunch/Debt Dinner
Boston, MA
August 20, 2003
Good evening, and thanks to all of you for joining me here in Boston.
It's been over two months since the Board of Directors of Freddie Mac asked
me to be CEO. At that time, I promised to keep you updated on our progress.
As part of that commitment, I have been on the "road" a lot in the
past few weeks.
At each event, I have described my vision for Freddie Mac – and how we
are going to achieve it.
Simply put, we aspire to be the premier financial institution in the world.
The reason for this bold vision is the critical importance of our mission to
lower costs and increase access to quality housing for more of America's families.
Our mission has never been more relevant or important-and we can only achieve
it by being the best at everything we do.
Now let me describe my top priorities for becoming the premier financial institution.
They are:
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Get our financial statements right;
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Build long-term shareholder value;
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Communicate effectively so that the public understands our business and
results; and
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Foster an open culture
Get Our Financial Statements Right
When I took this job, I told you that "Job One is getting our financial
statements right." But that is only the beginning. Several months ago,
we embarked on a 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 Baker Botts. The report raised serious concerns about the company's past
accounting, controls and disclosure processes and practices.
In response, I directed CFO Marty Baumann to expand his remediation effort
to ensure that each issue identified in the report is addressed with an action
plan to correct the deficiency.
In addition, we have retained the immediate past Director of the SEC's Division
of Corporation Finance to benchmark the disclosure processes and practices of
high-quality reporting firms – and replicate them at Freddie Mac.
These steps will enable us to make a seamless transition to an SEC reporting
company. I reaffirmed our commitment to SEC registration in a letter to Treasury
Secretary Snow in July.
Build Long-Term Shareholder Value
My second priority is to build long-term shareholder value.
Three core competencies are critical to our ability to do this: asset selection,
risk management and low-cost financing.
First, asset selection is critical to maintaining a high-quality mortgage portfolio
in both our investment and securitization businesses. It ensures we are well
positioned to participate in the broad array of products that characterize mortgage
debt outstanding.
Second, risk management has been - and will continue to be – a core competency
at Freddie Mac.
When I arrived in 1996, I was determined to develop an interest-rate risk management
framework that would allow us to grow in a safe and sound manner and fulfill
our mission – regardless of where interest rates happened to be.
Since 1998, we have managed through six cycles where interest rates moved between
150 and 250 basis points in a relatively short period of time. Throughout these
extreme interest-rate moves, Freddie Mac's risk profile remained low.
This is not news to investors because of the frequency of our interest-rate
disclosures.
Freddie Mac is one of only two financial institutions that disclose duration
gap on a monthly basis. And to my knowledge, Freddie Mac is the only financial
institution that discloses both duration gap and portfolio market value sensitivity
– or PMVS – on a monthly basis.
PMVS is important because it considers the potential loss of market value due
to both duration and optionality risk.
In the fall of 2001, rates rose by about 100 basis points in a one-month period
– similar to the move we experienced in July.
Because we were extremely well hedged, our duration gap moved by only one month
and our PMVS averaged 4 percent during that time period.
Experiences like these give me great confidence in Freddie Mac's ability to
weather significant market volatility. When we release our monthly volume summary
for July, you will see that – despite the tremendous rise in interest rates – Freddie Mac continued to maintain a low risk profile.
In sum, we strive to maximize shareholder value while taking the lowest possible
risk.
Very few institutions can claim such a strong risk position – one that
I am determined to maintain.
Our third core competency is low-cost financing. Freddie Mac's ability to lower
the cost of homeownership 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.
By bringing Wall Street to Main Street, 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 shareholder value,
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.
Communicate Effectively So that the Public Understands Our Business and Results
My next priority is to ensure that investors fully understand whether we are
fulfilling our objective of building shareholder value and operating in a safe
and sound manner.
To enhance investor understanding, we will provide three sets of results: GAAP,
a non-GAAP supplemental measure and fair value. Since I look at all three of
these measures in evaluating Freddie Mac's performance – I believe you should
have them, too.
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.
We will round out the picture by providing a quarterly fair value balance sheet.
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. It will be particularly helpful in understanding our performance
during – and immediately following – the restatement period.
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.
If we are successful at generating world-class risk adjusted returns (and I
am confident we will), we will maximize earnings over the long term regardless
of how they are measured.
Foster an Open Culture
My fourth priority is to foster an open culture at Freddie Mac. 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.
Going forward, we 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 I have been CEO, I have been very pleased with the response
I have received by simply picking up the phone and talking to people. I am confident
that we have a huge opportunity to build profitable business partnerships that
will enhance our ability to serve homeowners and renters.
Conclusion
In closing, let me say that Freddie Mac has a bright future. Freddie Mac is
a great American company with a great mission. I am determined to lead our company
to be the best at everything we do. And we will do it in a manner marked by
openness, transparency and candor. On behalf of the Freddie Mac employees and
myself, we are committed to achieving the mission and vision I described today.
This concludes my formal remarks. Let me now open the floor to questions. I'll
ask the first one: "Why are you the right person to lead Freddie Mac?"
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