Re: Looking for a Villain

John McLeod — Wed, 24 Sep 2008 12:53:16 -0000

I suggest you start with Fannie Mae whistle-blower and genuine hero in the piece Roger Barnes:
http://housingdoom.com/2006/07/24/fannie-mae-fr...

In retrospect, the construction of QSPEs during the Tim Howard era might serve as a proxy for a lot of what went wrong, but it's unlikely the FBI would ever find additional wrongdoing there.

The big problem was that FASB's formulation of their Rule 140 for qualifying vehicles for "sales treatment," and therefore going off-balance-sheet, was plastic enough so that greed led to another thousand Enrons. They've admitted enough themselves, deciding to do away with QSPEs altogether. But the prospect of some ludicrous number like $10 trillion of balance sheet consolidation has everyone running around in panic.

Don't forget that what touched off the present avalanche was that on July 7th a (former?) Lehman analyst quietly remarked that said accounting rule change was going to require Fannie and Freddie to raise more capital.
http://housingdoom.com/2008/07/07/crack-of-doom...

Off balance sheet deals yielded juicy profits during the boom but hid huge amounts of risk that weren't generally obvious even to insiders until what I called at the time the "Black Thursday" events of Feb 8, 2007, when HSBC and New Century reported the first significant bad news on subprime from companies of a significant size.
http://housingdoom.com/2007/02/15/black-thursda...

... so to answer the question of who's to blame, it's just a case of the super-accountants at FASB botching the construction of a key risk-management tool.
http://housingdoom.com/2006/08/07/gse-risks-2/

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Re: Looking for a Villain