FASB At It Again

Last month, I wrote a piece about how the Financial Accounting Standards Board (FASB) contributed to the current economic malaise. In “How FASB Caused the Credit Crisis,” I looked at how rules regarding fair value accounting forced companies to write down billions in subprime mortgage debt. Yesterday in his report, Lehman Brothers analyst Bruce Harting implicated FASB as further contributing to the problems that have prevented many Americans from obtaining mortgages. As reported by CNN Money, Mr. Harting cited a proposed rule change that would require Fannie Mae and Freddie Mac, which guarantee half of all US mortages, to move off-balance-sheet securities onto their balance sheets. Harting’s report indicates that doing so would require Fannie and Freddie to raise $46 billion and $29 billion in new capital, respectively, to support their balance sheets. Such a move comes at a time when neither government-backed lender can raise adequate capital to support its current operations, let alone the additional capital needed to support the proposed rule change. Just last week, The Wall Street Journal reported that Freddie Mac, which announced plans in May to raise $5.5 billion by issuing new shares, would likely not complete the rights issue until after it releases second-quarter earnings in August. Fannie Mae, in similar straights, raised $7.4 billion in April and May; it seems unlikely that Fannie could return to the market in the near term to raise additional capital, as the FASB rule change would necessitate.

Mr. Harting’s report, for all its doom and gloom, does indicate that the rule change is unlikely. He doesn’t foresee FASB acting so recklessly given current economic conditions. Fortunately for Fannie and Freddie, analysts seem to be in agreement that the likelihood these changes would be implemented is small. Nonetheless, FASB risks damaging its credibility and relevance with such a move. Congress would likely step in to prevent the change from effecting Fannie and Freddie, and could go so far as to strip FASB of its ability to function as an independent accounting regulatory body. We have already seen this with the Public Company Accounting Oversight Board, or PCAOB, which the Sarbanes-Oxley Act created following the Enron/Arthur Anderson scandal.