Freddie Mac ignored warnings in 2004 over dangerous bets

The head of Freddie Mac, the mortgage finance giant which is having to be propped up by the US government, ignored warnings as early as 2004 that the company's bets on the housing market were putting the financial system at risk.

A former risk manager at the Virginia-based company has revealed an internal memo he wrote, warning that underwriting standards were slipping and Freddie Mac was becoming exposed to potential losses.

Freddie Mac and its sister company, Fannie Mae, were set up to provide liquidity to the mortgage market, but they have plunged deep into the red since the US housing market went into its tailspin. Last month the Bush administration was forced to promise it would bail the companies out if they ran out of cash, and analysts believe US taxpayers could be on the hook for tens of billions of dollars of potential losses unless conditions improve.

The calamity was foreshadowed in a 2004 memo written for Freddie Mac's chief executive, Richard Syron, but he continued to expand the company's activities buying and selling home loans.

In an interview with The New York Times, Freddie Mac's former chief risk officer David Andrukonis recalled telling Mr Syron in 2004 the company was buying bad loans that "would likely pose an enormous financial and reputational risk to the company and the country".

Mr Andrukonis's memo, which stated that the firm's underwriting standards were becoming shoddier, was discussed and dismissed at a meeting with Mr Syron, it was alleged.

Freddie Mac says it cannot verify that the memo existed.

Angry politicians have turned their fire on Fannie and Freddie managers, alleging they were motivated by outsized pay packets rather than their official mandate to provide stability to the mortgage market. Congress passed legislation to make the bail-out of the companies conditional on limits to executive pay. Mr Syron has received $38m in compensation since 2003.

Mr Syron said that few people predicted the US housing market would decline to the extent it did. "If I had better foresight, maybe I could have improved things a little bit. But frankly, if I had perfect foresight, I would never have taken this job in the first place."