Freddie Mac's 107-page report last week on the results of its internal investigation seemed to confirm what many outsiders long believed - new accounting will mean more volatile earnings, but risk management metrics will be unaffected.
A day later, the risk management side of the equation no longer appeared quite so cut-and-dried.
In its June volume report, issued Thursday, Freddie said that it might have to revise two commonly used measures of its interest rate risk: portfolio market value sensitivity, which measures the impact of sudden rate movements, and the duration gap, which gauges how closely assets and liabilities match in maturity.
"Certain changes will affect the interest rate risk sensitivity disclosures" but should not alter the portfolio market value sensitivity by more than 2 percentage points or the duration gap by more than a month, Freddie said.
All seem to agree that the changes are relatively small and reflect less interest rate sensitivity than Fannie Mae tolerates in its portfolio. By last week, Wall Street was well prepared for the after-tax earnings adjustments of as much as $4.5 billion that a restatement would mean at Freddie, but the rate risk information came as a surprise.
Freddie has scored points with some investors by using derivatives and other hedging strategies to keep its rate risk low. "Management does not believe these adjustments will materially change this data," said a note in Thursday's report.
Fannie's consistently wider and more volatile duration gaps have provided fodder for critics concerned about the systematic risks the government-sponsored enterprises pose. In its second-quarter earnings report, released July 15, it said it would do more to manage its duration gap.
On an average day in June, Freddie's portfolio could have lost 1.94% of its value had Treasury yields moved 50 basis points, versus a 2.51% potential loss in June 2002, according to the volume summary. The duration gap was zero for the eighth time in 12 months.
It is unclear why the recalculation would be needed or in what direction the numbers might move. Douglas Robinson, a Freddie spokesman, said the changes to the rate risk figures would be "caused by something related to the accounting issues, and that's all we're saying about it right now."
In response to a question during a June 25 teleconference, Marty Baumann, Freddie's new chief financial officer, said its problems were "accounting questions and are not dealing with our capabilities" in managing risk.
"The only accounting issue that was dealt with at all here that goes to our risk measures is the valuation of some options, some derivatives that we discussed," Mr. Baumann said. "And that is a rather small impact, and it is an increase in the value of those which would not have much of an impact on our risk measures."
On the same call, Freddie's new chief executive, Greg Parseghian, also downplayed the effects of the restatement on its rate risk.
"The risk measures are based on fair-value metrics, and there is not an intersection between the accounting books and records and the fair-value-based risk management calculation, so it's a completely different set of measures," he said. "We have reviewed extensively the effect of the accounting change adjustments that we are making on the risk measurements, and the analysis today is there is not a significant effect on portfolio market value sensitivity or duration gap historically through time."
Vincent Boberski, the managing director of fixed-income research at Royal Bank of Canada's RBC Dain Rauscher Corp. in Chicago, asked the question about risk measures during the call. In an interview Tuesday, he said Freddie's acknowledgement that its restatement would affect its interest rate risk measures was "different from what they said in answer to my question on the conference call."
In earlier interviews Mr. Boberski has said that he wondered if Freddie was tempted to smooth numbers other than its earnings.
On Tuesday he said the possible changes to its rate risk measures could be significant enough to get investors' attention. "It's accounting that has very real implications in terms of their risk. Even a change of a percent or two, it's such a big portfolio it could have a noticeable impact in terms of dollars."
Other analysts also expressed surprise.
"The changes to interest rate risk measures are expected to be small on average," analysts at J.P. Morgan Securities wrote in a report Thursday. However, "it is still unclear how changes in accounting affect the company's risk management measures and how this disclosure reconciles with management's repeated assurances that interest rate risk measures remain intact."
Mr. Robinson of Freddie responded: "When things are identified, we are making that known the best we can."
In a teleconference last week, James Doty, the Baker Botts LLC partner who led the internal investigation into Freddie's accounting, said it did not reveal "any nexus" between the risk management practices and executives' attempts to smooth earnings.
