U.S. regulators are investigating the roles Wall Street firms played in questionable deals that mortgage finance company Freddie Mac concocted to massage earnings, an official said on Tuesday.
Morgan Stanley and Salomon Smith Barney, now a Citigroup Inc. unit, were among the firms that executed the deals, a source told Reuters.
Freddie Mac in July released an independent report that said company investment officers had created trades that had no benefit for the company other than to record earnings in future quarters in order to make it easier to meet earnings targets.
The report said the transactions were executed by at least five parties.
“We are in the process of reviewing the counterparties’ roles in transactions relevant to our investigation,” Corinne Russell, a spokeswoman for the Office of Federal Housing Enterprise Oversight, said.
Russell said the agency has a wide range of actions it can take in response to its findings in the Freddie Mac probe.
“We are considering several money penalties as part of that wide range of actions available to us,” she said.
Representatives of the Wall Street companies declined to comment.
The agency launched its probe this summer after government-sponsored, shareholder-owned Freddie Mac rattled investors by replacing senior executives over accounting irregularities the company acknowledged were central to a three-year earnings restatement estimated at about $4.5 billion.
Spreads between agency debt and Treasuries were a little wider on Tuesday, but traders said the gap was due to factors other than the news about Freddie Mac, including a ratings downgrade for several Federal Home Loan Banks on Monday.
Freddie Mac’s independent report said that senior executives had ignored accounting rules in pushing profits forward, creating trades to make it easier to meet earnings targets in the future.
The report said traders at Wall Street firms were nervous about some of the trades and sought reassurance the transactions were legitimate.
“I don’t want to be taken off in handcuffs here for doing something that’s not kosher,” one trader is quoted as saying.