DAVID S. HILZENRATH/The Washington Post | Posted: Tuesday, October 23, 2007 7:00 pm
WASHINGTON — Years before Freddie Mac was rocked by an accounting scandal, billionaire investor Warren Buffett got on the phone with Freddie Mac chairman Leland C. Brendsel and explained why he was selling shares of the giant mortgage funding company.
Brendsel had made pledges about earnings growth at Freddie Mac, and Buffett was apparently worried about where those promises might lead.
“All my history is that all institutions that have a primary goal of earnings growth get into trouble,” Buffett said, according to notes that Brendsel made of the conversation.
“I’ll never know when it happens until it’s too late,” said Buffett, whose Berkshire Hathaway was one of Freddie Mac’s biggest shareholders.
Freddie Mac, also known as the Federal Home Loan Bank, finances home ownership by purchasing home mortgages for resale in bundles as securities to institutional investors.
Brendsel read from his notes this week on the stand in an administrative trial to determine whether he should be held liable for more than $1 billion of penalties and damages related to Freddie Mac’s accounting errors and distortions. The scandal cost Brendsel his job in 2003.
A government lawyer brought up the 2000 phone call with Buffett as part of a broader attack on the financial goals that Brendsel set for Freddie Mac.
The government contends that Brendsel ran the McLean, Va., company recklessly, leading Freddie Mac to manipulate accounting, partly through sham transactions. Those abuses became necessary because Brendsel committed the company to achieving double-digit growth in annual profits, the government alleged.
Under questioning by government lawyer Stephen E. Hart, Brendsel spent much of his time on the witness stand debating the meaning of the word “commitment.”
Hart cited public statements such as a 1999 speech: “We remain committed to mid-teens earnings growth,” Brendsel said in the speech, adding, “And we will achieve it. … ”
Brendsel offered a nuanced interpretation on the stand.
“It was no firm, fast, hard goal,” Brendsel said on the witness stand. “It was a statement of aspiration and expectation” and “a belief in what we will be able to do,” he said.
Asked if he expected his employees to follow his guidance about “mid-teens earnings growth,” Brendsel said no, “because I felt that one could not realistically and appropriately stake out a firm, fast target for earnings growth” over multiple years.
Last week, Brendsel testified that he was so sensitive about employees overreacting to things he said that he hesitated to bypass the chain of command in asking questions of individual workers.
As for the call with Buffett, Brendsel did not elaborate on his notes. A spokeswoman for Buffett, who is slated to testify later, said the Berkshire Hathaway chairman will save his comments for the court.
According to Brendsel’s notes, as Buffett prepared to part ways with Freddie Mac, he told Brendsel he was “grateful for the money you made me” and offered some characteristically pointed homespun advice: “If you really want a marriage to last, you want to marry someone with low expectations.”
In an aside from the bench, the administrative law judge presiding over the trial, William B. Moran, said that Buffett’s quip reminded him of another comic observation about marriage: “My wife and I were happy for 20 years. And then we were married.”