Accounting changes help Freddie Mac 1Q beat views

Changes in accounting practices helped McLean, Va.-based Freddie Mac achieve better-than-expected results Wednesday. For example, Freddie adjusted how it accounts for derivatives, financial instruments used to hedge against swings in interest rates.

Under the new accounting practices, the company said it lost more than $1.3 billion on those derivatives in the first quarter, compared with a loss of nearly $2.3 billion in the fourth quarter of 2007.

"If you change the accounting rules, things can look better," said R. Christopher Whalen, managing director of consulting firm Institutional Risk Analytics.

Others saw the change as a needed improvement that better reflects performance. In a research note, Citigroup analyst Bradley Ball cited "improved accounting methodologies" as a reason for Freddie's positive results.

Freddie reported a first-quarter loss of $151 million, or 66 cents a share, beating the expectations of analysts polled by Thomson Financial, who expected a loss of 92 cents per share.

Skeptics have long warned that Freddie and its larger government-sponsored sibling Fannie Mae won't be able to withstand severe mortgage market losses without a federal bailout.

However, Freddie CEO Richard Syron said in a conference call with analysts that losses from the mortgage mess will be manageable "under any reasonable scenario."

Moody's Investors Service downgraded the company's financial strength rating, projecting Freddie Mac will be hit with up to $7.5 billion in total losses from soured mortgages over the next two years.

In another potentially troubling sign, a measurement of the company's total assets fell to negative $5.2 billion at the end of the first quarter, a huge swing from positive $12.6 billion at the end of last year.