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system. However, I believe it is important to permit the housing GSEs to have sufficient flexibility to adapt to a changing mortgage market. The liquidity that Fannie and Freddie provide to the market should not be compromised by unnecessary government regulation.

It is in the public interest to continue to encourage homeownership and maintain the proven housing finance system we have today. Mistakes have certainly been made at Freddie Mac, but I'm not convinced that means we must throw out the whole system. The GSEs deserve some credit for the vibrancy of our country's secondary mortgage market.

For more than 70 years, federal policy has encouraged homeownership. As we move forward, we must make certain that we do not begin to close the door to homeownership and curtail many Americans from realizing the American Dream.

Again, Mr. Chairman, I want to thank you for holding this hearing and our witnesses for taking the time to here. I look forward to the testimony.








JANUARY 21, 2004

Thank you, Chairman Baker, Ranking Member Kanjorski and Members of the
Subcommittee. It is a pleasure to be here today.

My name is Martin F. Baumann. I am the Executive Vice President and Chief Financial Officer of Freddie Mac. I joined Freddie Mac in April 2003. I was hired to build a strong finance function in Freddie Mac and to restore confidence in the company's financial reporting. I am committed to developing an exemplary finance function that produces accurate, timely, well-controlled and transparent financial reports.

Prior to joining Freddie Mac, I worked at PricewaterhouseCoopers for more than 30 years as a partner, as deputy chairman of the World Financial Services Practice, and as the Global Banking Leader. At PricewaterhouseCoopers, I was responsible for certifying the financial statements of some of the largest United States and international banking, insurance and other financial services companies.

I welcome the opportunity to be here today to discuss Freddie Mac's remediation program and compliance with the Consent Order between Freddie Mac and the Office of Federal Housing Enterprise Oversight (OFHEO).

Last year was a challenging year for Freddie Mac. In January, we announced a restatement of prior-year earnings and in June, our Board of Directors made changes in the company's senior management.

We have been working hard to regain the confidence of all of our stakeholders. We are implementing a corporate-wide remediation program to ensure that the accounting and financial control issues that led to the need for the restatement will never happen again. We have completed the restatement of prior-year financial results. This past December, OFHEO completed its special examination of Freddie Mac. At the same time, we entered into a Consent Order and Settlement with OFHEO that resolves matters relating to our restatement. We appreciate the Subcommittee's patience as we have worked through this process.

Freddie Mac's mission is to ensure a stable supply of low cost mortgages for America's families – whenever and wherever they need them. For more than 30 years, Freddie Mac has helped meet the home financing needs of families at all income levels, in all communities, and in all parts of the country. We recognize our special responsibility to homebuyers, the public, the Congress and investors. Despite our difficulties last year, we maintained our focus on fulfilling these responsibilities.

Freddie Mac's highest priorities are remediation and compliance with the Consent Order, along with bringing our financials current. We are firmly committed to building an environment that delivers comprehensive and understandable information incorporating the highest level of financial transparency, accounting controls, compliance, and professional standards.

Testimony of Martin F. Baumann
Subcommittee on Capital Markets, Insurance

and Government Sponsored Enterprises
January 21, 2004
Page 2 of 7

Now, Freddie Mac is focused on the future. We are headed in the right direction, and we have the right leadership to reach our goals in our new Chairman and Chief Executive Officer Richard F. Syron. Dick has extensive industry expertise, and corporate leadership and financial experience, having led a Fortune 500 firm, served as chairman and chief executive officer of the American Stock Exchange, and served as the president of the Federal Reserve Bank of Boston and as president of the Federal Home Loan Bank of Boston. He is committed to our important public mission and to regaining the full confidence of the public and our stakeholders.

Before addressing our remediation and compliance efforts, allow me to say a few words about the completion of our restatement of prior financial results.

Completing our Restatement and Fulfilling our Mission in 2003

On November 21, 2003, the Freddie Mac Board of Directors and our management team announced the release of the company's restated and revised financial results for the years 2000 through 2002. The restatement was a significant step in Freddie Mac's progress toward achieving accurate and timely financial reporting.

Freddie Mac completed this restatement while maintaining our business fundamentals and delivering on our congressional mandate to make mortgage credit more available for America's families. We remain fully committed to our mission of helping make housing more affordable for more Americans and maintaining liquidity in the housing market, which, for the past several years, has bolstered the US economy.

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In fulfilling our mission, Freddie Mac plays an important role in maintaining the strength of the housing sector, a sector that directly accounts for approximately 15 percent of the Gross Domestic Product (GDP) and has accounted for 36 percent of the growth in GDP over the last two years.' Furthermore, we have contributed to growth in the economy by helping homeowners refinance into lower rate mortgages and redeploy some of their housing equity.? These benefits are directly attributable to the long-term, prepayable fixed rate mortgage, which our activities make widely available.


The restatement did not affect the fundamental strength of Freddie Mac's business. Freddie Mac's business operations remain strong and interest-rate risk and credit risk remain low. Our risk profile remains conservative, with an average duration gap of zero

These percentages are based on data published by the Bureau of Economic Analysis, U.S. Department of Commerce for 1996 through 2003 and data for the same years available upon request from Freddie Mac.

? See Remarks by Federal Reserve Chairman Alan Greenspan before the Annual Convention of the Independent Community Bankers of America, Orlando, Florida, March 4, 2003, available online at

Testimony of Martin F. Baumann
Subcommittee on Capital Markets, Insurance

and Government Sponsored Enterprises
January 21, 2004
Page 3 of 7

for November 2003, unchanged from October. In fact, we maintained a low duration gap throughout 2003.

Now, let me return to the focus of my testimony: Freddie Mac's remediation program and compliance with the Consent Order between Freddie Mac and OFHEO.

Remediation Program

Freddie Mac is currently engaged in an active remediation program. The steps that we are taking combine the steps required by the Consent Order with the actions that were underway in our preexisting remediation program.

Freddie Mac's Board of Directors has been working closely with management to carry out a remediation program that will advance our mission and serve all of our stakeholders. During the spring of 2003, the Governance Committee of the Board of Directors tasked me with the development of a remediation program to ensure that the factors contributing to the need for the restatement would not recur. Thereafter, the Board of Directors approved a comprehensive remediation program that has been and is effecting far-reaching changes in the company's financial reporting, control and management functions.

Freddie Mac's Board of Directors is actively overseeing management's implementation of the remediation program. During 2003, the Board's Governance Committee overseeing the remediation program, and the Audit and Ad Hoc Committees overseeing the restatement, held individual or joint committee meetings on 55 separate occasions to review the progress on the restatement and consider aspects of remediation implementation. Throughout this period, we provided periodic updates on our remediation program to OFHEO.

On December 9, 2003, Freddie Mac entered into a Consent Order and Settlement with OFHEO. On the same day, OFHEO released the report of its special examination of Freddie Mac.

Under the terms of the Consent Order, Freddie Mac agreed to undertake remedial actions relating to corporate governance, internal controls, intemal audit, internal accounting capabilities, risk management transactions, and public disclosures and regulatory reporting. The Consent Order and the company's completion of the required resulting remedial actions are essential to restoring full confidence in Freddie Mac.

The Consent Order added further key items to our existing remediation program resulting in an enhanced comprehensive remediation program designed to ensure the integrity of Freddie Mac's financial reporting, controls and governance, and also to prevent a recurrence of the problems that led to the need for the restatement. We have been

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