On Friday morning Freddie Mac unveiled its long-awaited earnings restatement, saying it underreported profits by almost $5 billion for the 2000 to 2002 period (and earlier), while admitting it actually overstated 2001 earnings by $989 million.As result of accounting errors and mistakes, Freddie Mac did not properly recognize a $1.9 billion loss in the value of its derivatives in 2001, including a $1.1 billion hit in the first quarter alone. After correcting these errors, Freddie Mac retroactively suffered a $111 million earnings loss in the first quarter of 2001, which was originally reported as a profitable quarter with earnings of $832 million. The company is under investigation by the Justice Department, the Office of Federal Housing Enterprise Oversight, and the Securities and Exchange Commission in regard to allegations that officials there intentionally "smoothed out" earnings. Freddie Mac chief accountant Martin Baumann said during a Friday morning conference call that the restatement of earnings shows that earnings have been volatile and will continue to be volatile. In response to a question, the chief accountant said it is difficult to determine how much of the volatility is due to accounting mistakes versus changes in interest rates. "It is very hard to separate the two," he said. "They are really intertwined."

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