Before its portfolio of bad loans helped trigger the housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors.

One of those board members was Rahm Emanuel, now chief of staff to President Obama. Emanuel earned at least $320,000 for his 14-month stint at Freddie Mac.

Emanuel plays a critical role in addressing the nation’s mortgage woes and fulfilling the administration’s pledge to impose responsibility on the financial world -- the type of responsibility that appeared to be absent at Freddie Mac.

Emanuel, 49, is a veteran Democratic strategist and fundraiser who served three terms in the U.S. House after helping elect President Clinton and serving as his White House political director. The Freddie Mac money was part of $16 million that Emanuel earned in three years as an investment banker a decade ago.


Clinton appointed him to the Freddie Mac board in February 2000.

The board met no more than six times a year. Unlike most directors, Emanuel was not assigned to any of the board’s working committees, according to company proxy statements. A spokeswoman for Emanuel disputed that.

Emanuel and other new directors qualified for more than $300,000 in stock and options plus a $20,000 annual fee, records indicate.

During Emanuel’s stint on the board, Freddie Mac executives told the board of a plan to use accounting techniques to maximize profits that the government-chartered firm was reaping from risky investments, a 2003 investigative report found.


The report by Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, found that the goal was to shift earnings into the future, ensuring that Freddie Mac would appear profitable for years. Falcon noted that this action boosted executives’ subsequent annual bonuses.

Falcon criticized the board for its acquiescence, saying it “became complacent” and “failed to make adequate inquiries of management and obtain sufficient information upon which to make decisions.” His criticism was little noticed at the time.

The ensuing scandal forced Freddie Mac to restate $5 billion in earnings and pay $585 million in fines and legal settlements.

Many of those same risky investment practices eventually brought the firm to the brink of insolvency and led to its seizure last year. The Bush administration pledged to inject up to $100 billion to keep the firm afloat, and the Obama administration has doubled that commitment.


Freddie Mac reported recently that it lost $50 billion in 2008. So far it has tapped $14 billion of the government’s guarantee and said it soon would need an additional $30 billion to keep operating.

Like its larger government-chartered cousin, Fannie Mae, Freddie Mac was created by Congress to promote home ownership, though both are private corporations with shares traded on the New York Stock Exchange. The two firms hold stakes in half the nation’s residential mortgages.

Because of Freddie’s federal charter, the board in Emanuel’s day was a hybrid of directors elected by shareholders and those appointed by the president.

In his final year in office, Clinton tapped three pals: Emanuel, Washington lobbyist James Free and Harold Ickes, a former White House aide instrumental in Hillary Rodham Clinton’s initial Senate campaign. Free’s appointment was for four months and Ickes’ for three months.


Falcon found that presidential appointees played no “meaningful role” in overseeing the company and recommended that their positions be eliminated.

Former President George W. Bush voluntarily stopped making such appointments after Falcon’s assessment of their uselessness.

John Coffee, a law professor and expert on corporate governance at Columbia University, said the financial crisis at Freddie Mac was years in the making and fueled by chronically weak oversight by the directors. The presence of presidential appointees on the board didn’t help, he added.

“You know there was a patronage system, and these people were only going to serve a short time,” Coffee said. “That’s why [they] get the stock up front.”


Financial disclosure statements that are required of U.S. House members show Emanuel made at least $320,000 from his time at Freddie Mac. Two years after leaving the firm, Emanuel reported an additional sale of Freddie stock worth between $100,001 and $250,000.

Sarah Feinberg, a spokeswoman for Emanuel, said there was no conflict between his stint at Freddie Mac and Obama’s vow to restore confidence in financial institutions and the executives who run them. At the same time, Feinberg said, Emanuel now agrees that presidential appointees to the Freddie Mac board “are unnecessary and don’t have long enough terms to make a difference.”

In an interview, Falcon said that the Freddie board did most of its work in committees. Proxy statements that detailed committee assignments showed none for Emanuel, Free or Ickes during the time they served in 2000 or 2001. Most other directors carried two committee assignments each.

But Feinberg said she believed Emanuel served on committees that oversaw Freddie Mac’s investment strategies and mortgage purchase activities. She acknowledged she had no documents to back up that assertion.


The Obama administration rejected a Tribune request under the Freedom of Information Act to review Freddie Mac board minutes and correspondence during Emanuel’s time as a director. The documents, obtained by Falcon for his investigation, were “commercial information” exempt from disclosure, according to a lawyer for the Federal Housing Finance Agency.

Emanuel’s board term expired in May 2001, and soon after he launched his congressional bid. He joined the House in January 2003 and was named to the Financial Services Committee, where he also sat on the subcommittee that oversaw Freddie Mac. A few months later, longtime Chief Executive Leland Brendsel was forced out and the committee and subcommittee launched hearings to sort out the situation. Emanuel skipped every hearing, congressional records indicate.

Feinberg said Emanuel recused himself “from deliberations related to Freddie Mac to avoid even the appearance of favoritism, impropriety, or a conflict of interest.”

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bsecter@tribune.com

azajac@tribune.com