Another Black Mark For Accountants--At Least In My Eyes

I'm in the minority when it comes to bashing the accounting profession for their mark-to-market accounting that was adopted. Well, it looks like another dumb proposal--thankfully it's just a plan and not a reality yet--called FAS 140. Fannie Mae and Freddie Mac plunged today on supposedly a Lehman analyst report saying that they need to raise $40+ billion if FAS 140 goes into effect.

Freddie Mac fell as much as 29 percent and Fannie Mae dropped as much as 26 percent, reaching their lowest price in 13 years, after Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force them to raise a combined $75 billion in capital...

The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients today.

Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote.


Only would an accountant, who likely knows a lot about numbers but very little about finance, come up with such a policy in the thick of a credit crisis. It should be obvious to anyone that Fannie and Freddie won't be able to raise that amount of capital.

The Lehman analyst goes on to say that Fannie and Freddie will likely get an exemption but I feel that makes it even worse. The last thing we need are some companies using one rule while others are granted exemptions. The rule changes should be delayed or done away with. That's my non-accounting view.

The FAS 140 rule was highlighted in the past by Barry Ritholtz of The Big Picture about a month ago but its impact is only being felt by the market now. I have no idea why all these rule changes are being made right now and at a accelerated pace. Shouldn't they be rolling these out slowly with a lot of consultation?

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2 Response to Another Black Mark For Accountants--At Least In My Eyes

July 8, 2008 at 3:36 PM

Just want to comment on your thoughts here:

"Only would an accountant, who likely knows a lot about numbers but very little about finance, come up with such a policy in the thick of a credit crisis."

Accounting and Finance are linked. 99% of the CFOs out there are accountants. I have never met a CFO who is not an accountant.

"I have no idea why all these rule changes are being made right now and at a accelerated pace. Shouldn't they be rolling these out slowly with a lot of consultation?"

Accounting rules are not made in a vacuum. Changes in laws are made through a consultation process and the same is done with accounting rules. Industry, Government and Accountants are all involved.

Accounting rules and principles are far from perfect, but the bottom line is that changes are made to the rules to reflect economic reality as best as possible.

Chris

July 8, 2008 at 4:09 PM

Thanks for defending the accounting profession Chris--I assume you are one :) I'm still disgruntled with you guys for moving so quickly on many questionable items...

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