The New York Times, in "Loan Giant Overstated Its Capital Base," sets forth an interesting bill of particulars as to where Freddie deviated from what one might consider a full and fair statement of its financial condition. Indeed, the article says that the widely-expected Sunday intervention was triggered by the GSE's regulator determining that the firms' capital was short of the reported level (note that Fannie's practices were not as aggressive as Freddie's). Bloomberg had indicated yesterday that the rescue was being announced prior to a FHFA [Federal Housing Finance Agency] evaluation of their capital. We noted:

... it seems likely that there was something due to be released [in the report] that either gave James Lockhart, the head of FHFA, the smoking gun to intervene, or was sufficiently troubling to run the risk of an adverse market reaction...

Yet, as Calculated Risk pointed out, the Times had an artfully worded comment (emphasis ours)

The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the companies? capital resources and financial stability.

CR said, "I doubt Freddie violated any accounting rules this time" without explaining why. I'm cynical enough that the powers that be would like to tone down any suggestion that questionable accounting treatments might have been fraudulent (that opens up all sorts of cans of worms, including litigation, which are distractions that would make the job of any new conservator all the more difficult.

But his view may be based on this accounting contretemps with Freddie reported in the Washington Post earlier this year:

Years after Fannie Mae and Freddie Mac were found to have misrepresented their earnings by billions of dollars, a federal regulator is warning them to follow both the spirit and the letter of a new accounting rule.

The Office of Federal Housing Enterprise Oversight said it would consider taking action against the government-sponsored mortgage funding companies if their handling of the new rule raises concerns, even if their conduct "technically complies with the accounting standard."

The OFHEO statement came less than a week after the regulatory agency said it found "certain issues" in Freddie Mac's implementation of accounting standards which "raise concerns" about the company's capital...

Sounds familiar, no? Nevertheless, the Times' list of, shall we say, items of note, is striking, with the biggest surprise last:

For years, both companies have effectively recognized losses whenever payments on a loan are 90 days past due. But, in recent months, the companies said they would wait until payments were two years late. As a result, tens of thousands of loans have not been marked down in value.

Another bone of contention was the inclusion of deferred tax credits in assets. When Jonathan Weil of Bloomberg had suggested that the use of tax credits might produce an unduly rosy balance sheet; some dismissed it, arguing in effect that the tax assets would have value because 1) the GSEs would at some point be profitable, so the tax shield did have value, and in any event, a successor could use the assets were the GSEs reorganized.

The Times addressed some of these issues:

....such credits have no value unless the companies generate profits. They have failed to do so over the last four quarters and seem increasingly unlikely to the next year. Moreover, even when the companies had soaring profits, such credits often could not be used. That is because the companies were already able to offset taxes with other credits for affordable housing.

Most financial institutions are not allowed to count such credits as assets.

The Times also contends:

Freddie has not written down many of its subprime and Alt-A exposures to market value

Both companies appear to be managing earnings by delaying increases in loan loss reserves

As the search for the guilty continues, expect to see more post mortems of strategy (were the GSE's doomed to run aground due to their conflicted public/private charter?) and management decisions.