Rahm Emanuel ignores Hard Truth about Freddie Mac

From the Gery Chico For Chicago Mayor campaign…

Facts suggest Emanuel ignored scandal but mayoral candidate continues to ignore questions

(CHICAGO) Several hours ago, Rahm Emanuel was asked about Gery Chico’s charge that when Emanuel was informed of scandal on the Freddie Mac board, he sat on his hands and took the cash.

Emanuel didn’t deny it. Instead, he said he was never mentioned “by name” in any of the wrongdoing. Here’s the hard truth – Rahm won’t answer the hard questions about Freddie Mac. Supported by facts reported in detail by the Chicago Tribune and backed up by the Falcon report prepared by the Office of Federal Housing Enterprise Oversight (OFHEO) , Chico stood by his statement that when Emanuel had the chance to blow the whistle on corrupt government, he instead chose to turn his head the other way and take the cash.

“With less than five weeks to go until the election, Emanuel must give voters an explanation on why he didn’t blow the whistle on corruption,” Gery Chico said.

According to the Falcon report, the entire Freddie Mac board of directors, including Rahm Emanuel, was made aware of an accounting scandal during Emanuel’s tenure. Additional key findings in the report – which is attached – are:

1- Under Emanuel’s tenure on the Freddie Mac board, Freddie Mac misreported profits by billions of dollars in order to deceive investors.

2 – The entire Freddie Mac board repeatedly ignored warnings about serious accounting problems that led to the biggest federal housing scandal in history during the time Emanuel was on the Board.

3 – Neither Rahm Emanuel nor any other member of the Freddie Mac Board ever blew the whistle to alert taxpayers about the scandal, which ended costing taxpayers more than a half a billion dollars.

Below are key excerpts featured in the Falcon report.


Later in the report (~pp109), under a subsection titled: “Inadequate Implementation of the Financial Reporting Controls Improvement Plan”, the report details how Freddie Mac failed to effectively implement their Financial Reporting Controls Improvement Plan (FCRIP). This plan was developed after an August 2000 audit of financial reporting the deemed controls were marginal – specifically, the Freddie Mac had insufficient controls over the financial reporting process to ensure that significant errors are either prevented or detected at an early stage.

Phase 1 of the FCRIP, which was reviewed and approved by the audit committee and completed in March 2002, was supposed to have addressed thee findings. However, the Falcon Report identified several “red flags” that had been missed or ignored, including:

A reconciliation problem noted in late 2001 affecting the organizations general ledge. An October 23, 2001 memo concerning by Brian Gree stating that “to be successful, the Corporate Accounting organization needs to improve more rapidly” – noting that the VP of Corporate Accounting was moving re-organization along far too slowly to bring about the changes needed.

Concerns raised in February 2002 by Bernard Bethke, a Director in Internal Audit, who raised specific concerns about the FRCIP – specifically, that the Service Level Agreements still needed to be implemented. He also stated that the reporting of unreconciled differences was misstated because Corporate Accounting had subtracted some items that were considered to have a material financial impact even though they had not been fully reconciled. More generally, the Falcon report noted that Bethke concerns should have raised general alarm over whether the FRCIP fully addressed the financial reporting problems.

A Financial Reporting audit in November 2002 indicated that the FRCIP had its own control issues – rating controls as “marginal, while finding many of the same problems as previously, as well as new ones.

It was for these reasons that the Falcon Report stated:

“Evidence to date suggests that senior management and the Board of Directors of Freddie Mac knew of a serious problem and yet refused to accept full responsibility and commit the resources necessary to assure that the problem was corrected.” Page 112 12/03, Office of Federal Housing Oversight, “Falcon Report”

The Report goes on to state:

“The Board of Freddie Mac was aware of control weaknesses and other management issues that were root causes of many of the problems that led to the ongoing restatement of the financial reports of the Enterprise. The non-executive Directors either 1) did not recognize those “red flags” and make reasonable inquiries of management or 2) failed to take appropriate actions to address the issues raised by the “red flags”.v Page 145, 12/03, Office of Federal Housing Oversight, “Falcon Report”

“The non-executive Directors failed again when then-CFO John Gibbons unexpectedly resigned in March 2000. Those Directors failed to ask management, in light of the Business Development obligations of Mr. Reynolds and the credentials of the interim CFO, who was going to assume responsibility for that important function. Nor did they ascertain who would oversee the activities and efforts of the Corporate Accounting unit that was stretched thin and facing increasing volumes and ever more complex transactions.

There is no evidence that when acting CFO Vaughn Clarke informed the full Board in September 2000 that the Controller would be leaving his position, any of the non-executive Directors asked if it was significant that within six months of the resignation of the Chief Financial Officer, the Controller was also leaving his position. Nothing suggests those Directors recognized the cumulative impact those changes could have on an Enterprise with financial reporting controls that had deteriorated to the point that the Internal Audit Department informed the Board they were marginal. Given the lack of qualifications of the new CFO and the marginal controls in financial reporting, the fact that the Directors took no appropriate action to ensure that the Interim Controller had the skills needed at that critical juncture is significant.



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