Sunday, September 07, 2008

The interesting Fannie and Freddie question

Robert Reich asks the same question that interests me:
Robert Reich's Blog: Fannie and Freddie, and Why the Accounting Gimmicks Continued

... Accounting gimmicks first came to light at Fannie and Freddie in 2003, at which time Fannie's and Freddie's former CEOs were sacked. Why, then, did they continue for another five years, even under new CEOs, even after policymakers first learned of them?...
I read a persuasive NYT summary of the newest accounting scams. On initial review they weren't technically illegal, but the motive for they key maneuvers was deception. (One of the pair was more honest than the other, unfortunately I can't say which.)

So the interesting question is indeed why the new CEOs, chosen after an accounting scandal, ended up toasting, if not cooking, the books.

I'm open to suggestions, but here are my biases:
  1. I suspect most CEOs would play the same games. This is, by and large, how publicly traded companies do business. Legal, but tricksy.
  2. With a few luck breaks it might have worked, in which case the CEOs would be lauded for their brilliant leadership, feted in the Harvard Business Review, and the accounting gimmicks would be forever forgotten.
  3. If we don't like these games, we could try changing accounting rules. I believe that's supposed to happen sometime in the next decade. I suspect the changes won't work however.
  4. We should do more to keep corporations smaller and competion more active -- so when games are played taxpayers don't bear such a great risk. Let the shareholders pay the price for creative accounting.

1 comment:

alanbooker said...

One would wish that such maneuvers would be on the up but sadly it appears as though there is no control at all and the common tax payer is once again left with the bill!

It certainly does not look good for the long term as the gulf between those who are able to “tricksy” and those who just work for a living widens!

Alan