The Freddie Scandal: Follow the Money, or the Accountants, or Both.

Here's what the Freddie Mac "restatement scandal" really boils down to: who in their right mind at the company was supporting the concept of hiding or smoothing out the firm's stellar earnings?

That's what it's all about. Oh, there are other ancillary issues, too - but the earnings and the concepts behind how and when earnings should be booked is what it's all about. As this scandal unravels you can anticipate reading - and hearing - a lot about hedging, derivatives, held-to-maturity accounts, GAAP, PMVS (portfolio market value sensitivity) and an accounting firm called Arthur Andersen.

Remember that name: Arthur Andersen. Andersen is the firm that Freddie Mac fired in early March 2002 as energy giant Enron was melting down into a financial abyss. Andersen, as you might recall, was Enron's accountant. Remember how high and mighty and politically well connected Enron once was? Remember Ken Lay, its former chairman? He had political

juice big time, as in George W. Bush. But we're getting a bit sidetracked.

The issue here is Freddie Mac, its hedge accounting (we think) and Arthur Andersen. When it comes to employees getting canned, this is how the Freddie Mac scandal is going to play out: anyone (and I do mean anyone) at Freddie Mac who was boldly in favor of adopting accounting policies that would allow it to hide or smooth out earnings is toast. Hasta la vista, baby.

Not only is Freddie Mac investigating its own accounting policies and practices, but so is the U.S. Attorney's office, the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight. (Former SEC counsel James Doty has been retained by Freddie to handle its in-house probe.) There will be zero tolerance for anyone who screwed up, anyone who is on-the-record in company documents cheerleading the idea of deferring income because it would look good to Wall Street. (Analysts hate surprises, either good or bad.)

Any Freddie Mac employee whose name is on a memo, a working paper, or any other accounting-related document supporting the idea of booking today's profits tomorrow will be fired. End of story.