It was last week during testimony at a House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises hearing that OFHEO director Armando Falcon voiced the surplus notion as an effort to keep a tighter reign on the organization following revelations of misguided accounting practices last summer. It was those practices, according to OFHEO's December 2003 Report of the Special Examination of Freddie Mac, which led to Freddie Mac declaring a $5-billion overstatement of earnings. Upon release of the report, Freddie Mac signed a Consent Order and Settlement with regard to the restatement that called for the lender to pay a $125-million fine and to rectify pertinent procedures in areas ranging from governance and internal controls to corporate culture.

"Until remediation efforts have taken full effect, Freddie Mac remains exposed to substantial management and operations risk," Falcon said in his testimony at the hearing. "The report recommended that OFHEO consider addressing this concern by requiring Freddie Mac to hold significant regulatory capital surpluses, at least until it can produce timely and Generally Accepted Accounting Principles-consistent financial reports." OFHEO and Freddie Mac are ironing out the particulars of the surplus increase, so details of the agreement are expected to be released by the end of the week.

In the meantime, OFHEO is continuing its inquiry into what went wrong with Freddie Mac by attempting to subpoena former Freddie Mac CFO Vaughn Clarke, who resigned from his position when news began to emerge of major accounting department transgressions.