Richard Syron's retrenchment of Freddie Mac advanced another step on Monday, as the government-sponsored enterprise said it would dismantle its broker-dealer operation, a unit that had been a source of criticism.
The move, which surprised many in the industry, is the latest by Mr. Syron to refocus Freddie on its basic mission of supporting the mortgage market. Not only was the outfit at the center of questionable transactions allegedly devised by his predecessors to smooth earnings; its very existence raised hackles.
Critics had said the securities sales and trading group added to Freddie's risk and profits without doing much to further its mission. By closing it, Mr. Syron, who became chairman and CEO in December, signaled that Freddie would become a less active trader of mortgage-backed securities.
Freddie said that the securities sales and trading group would be wound down in the next few months. Afterward it will no longer make markets in its mortgage bonds, which the group had done. It will purchase mortgage-backed securities only to hold its retained portfolio - not for trading accounts. The GSE said its core businesses of buying, securitizing, and insuring mortgage assets would be its main tools to "support the liquidity and depth of the market" for its bonds.
Observers said the move raised the question of whether the group, which competes with Wall Street and originator-owned trading desks, ever played a central role in meeting Freddie's mission, or only made the GSE more like a hedge fund.
"If they were ever really questioned on it, Syron couldn't justify it," said Paul J. Miller of Friedman, Billings, Ramsey & Co. Inc.
Douglas Robinson, a Freddie spokesman, would only repeat Mr. Syron's quote from the press release that the new setup will be a more effective and efficient way of serving Freddie's mission.
Mr. Robinson would not say whether Freddie would lay off any of the group's employees, but cited the transfer of some of its functions as a reason some employees may not be affected.
The group, often referred to as SS&TG, figured prominently in reports last year about the improper earnings management encouraged by previous Freddie executives, which led to a $5 billion restatement of 2000-2002 profits.
Some analysts said it was doubtful Freddie would close a lucrative business. But Mr. Miller called the group "highly profitable." Several investment banks have been creating or bolstering mortgage-bond trading desks this year.
In a related move, Freddie said it would end a "money manager" program, through which investment advisers manage "a small portion of the company's capital under prescribed investment guidelines."
Freddie said on it Web site that the investments are "primarily" in its mortgage bonds and the goal is to increase their liquidity.
The broker-dealer group played a central role in Freddie's accounting scandal. Though it was senior management that pushed for smooth earnings, the group executed some of the trades. The report last year by the Office of Housing Enterprise Oversight on Freddie's improper earnings management questioned whether there was any "Chinese wall" between trading activities and management of Freddie's retained portfolio. An OFHEO spokeswoman said Monday that it did not make Freddie disband the group.
A Fannie Mae spokesman said it would not discuss Freddie's announcement. Several sources said Fannie has no similar trading desk but that it had no need for one, since its securities are more liquid than Freddie's.
Michael Marcus, the senior vice president of secondary marketing at Sovereign Bank in Reading, Pa., said his company often sells mortgage securities forward to Freddie's trading desk to hedge its pipeline. But he said Sovereign can simply use other broker-dealers more.
