The FAS 133 Guillotine: Could You Be Next?(Financial Accounting Standards)

First, it happened at Freddie Mac. Next, it was Fannie Mae's turn. The question mortgage servicers should be asking is "could it happen to me."

The senior most executives at both of the housing GSEs have lost their jobs over the past two years, involuntarily in almost all cases, in response to accounting scandals that centered around the implementation of complex new accounting rules for the treatment of hedging vehicles and derivative securities. While both GSEs remain strong, with growing earnings and solid prospects, that wasn't enough to save former Freddie Mac CEO Leland Brendsel or Fannie Mae chief Franklin Raines. Both of these distinguished executives and their top deputies were ushered out the door with little thanks and an ensuing controversy about severance compensation.

Why do we think mortgage servicing executives, and senior management at your parent companies, should be worried?

Because nobody really knows how to implement FAS 133 properly, and a growing chorus of critics believe that the accounting rules themselves may be to blame for at least some of the controversy that has engulfed Fannie Mae and Freddie Mac. FAS 133 was designed to make balance sheets more "transparent," but in effect it is making it increasingly difficult for lenders to hedge complicated assets like mortgage servicing rights from an economic perspective. That's because some executives believe if they get the economics of hedging right, they risk running afoul of accounting rules.

Lenders should be allowed to manage their business based on economic and market considerations. The accounting rules should be designed to give investors a clear view into what is going on. But when the accounting rules ...