GAAP == A BIG PART OF THE PROBLEM

(NOTE: GAAP == Generally Accepted Accounting Principles)

I don't know if Freddie Mac and Fannie Mae are in deep trouble or not but part of the problem is the accounting chicanery they can legally get away with.

Doubts Raised on Big Backers of Mortgages
By CHARLES DUHIGG
Published: May 6, 2008
NY Times


A report released earlier this month by Mr. Lockhart, the regulator, noted that although Freddie and Fannie had a combined $19.9 billion of “unrealized losses” on mortgage-related investments, neither company had reduced its earnings to reflect those declines. That is because they judged the losses to be temporary — in essence wagering that the mortgage market would recover before those assets were sold. Such a wager is permitted by the rules but difficult for outsiders to analyze.

The regulator’s report also noted that Freddie used accounting choices that gave it an immediate $1 billion capital increase. While those and other tactics are technically permitted, the regulator said, they deserve scrutiny.

“Companies can make assumptions that cause very large differences in what they report,” Mr. Lockhart said in an interview.