Monday, September 8, 2008

Big News: Fannie Mae, Freddie Mac, Big 4 and IFRS

On Sunday, Sept. 7, 2008 U.S. Treasury Secretary Henry M. Paulson and Federal Housing Finance Agency (FHFA) Director James Lockhart announced that FHFA has placed the two Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, into a conservatorship. This action, and three related actions to help stabilize Fannie and Freddie’s funding and liquidity, “are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve,” said Paulson.

Fannie Mae, Freddie Mac Placed Into Conservatorship, Other Actions Taken
As noted in FHFA’s Notice of Establishment, FHFA was formed under the Federal Housing Finance Regulatory Reform Act of 2008. The Act, enacted July 30, 2008, “provide[d] for the abolishment of the Office of Federal Housing Enterprise Oversight (OFHEO) and the Federal Housing Finance Board (FHFB) one year after the date of enactment. These agencies, together with the [HUD’s] Government-Sponsored Enterprise Mission Teams, are combined to establish FHFA.” Additionally, “FHFA has regulatory authority over … Fannie Mae… Freddie Mac and the Federal Home Loan Banks.”

“Based on what we have learned about these institutions over the last four weeks,” said Paulson, “including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.”

Accounting and Capital
Related to the topic of capital requirements, we reported last week that FASB plans to release its proposed amendments to the securitization and consolidation standards – FAS 140 and FIN 46R – by September 15. We previously reported that FASB has been closely dialoguing with the banking regulators – including, specifically, OFHEO, as stated by FASB Chairman Robert Herz at FASB’s July 30 board meeting. Separately, FASB announced on Friday it is holding a webcast on FAS 157, Fair Value Measurements on Sept. 29]

GSE’s Had Inherent Conflict of Interest
FHFA’s Lockhart explained on Sunday, “conservatorship… is a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate the Enterprises until they are stabilized."
Paulson added, “I support the [FHFA] Director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.”

As part of the actions announced on Sunday, the CEOs of Fannie Mae and Freddie Mac - Daniel H. Mudd and Richard F. Syron, respectively – have stepped down, and were replaced by Herb Allison (Fannie Mae) and David Moffett (Freddie Mac). Allison has been Vice Chairman of Merrill Lynch and Chairman of TIAA-CREF. Moffett was Vice Chairman and CFO of US Bancorp until he retired last year.

Paulson said, “I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction.” He added, “GSE managements and their Boards are responsible for neither.” The tone of his remarks was slightly different from that of President George W. Bush’s remarks on the situation. The “conflict of interest’ situation regarding the GSEs is the focus of Floyd Norris’ article in the NYT today, “The Dilemna of Fannie and Freddie.” The four actions taken yesterday to stabilize Fannie Mae and Freddie Mac are summarized in: Paulson's remarks, Lockhart's remarks, 1. Fact sheet on FHFA Conservatorship 2. Fact sheet on Treasury Preferred Stock Purchase Agreement , 3. Fact sheet on Treasury GSE Credit/Liquidity Facility , 4. Fact sheet on Treasury MBS purchase program.

UPDATE: See also "Auto Executives Seek Government Help" by John Stoll, Stephen Power and Corey Boles on pg A3 of today's Wall Street Journal, and a related Opinion column on Pg. A19 by Paul Ingrassia, former Detroit bureau chief of the WSJ, "Detroit's Backmail Attempt is Beyond Shameless."

More Big News - Big 4 Top List for New Hires
The Big 4 audit firms are among the top 5 companies for new hires, according to the cover story in this week’s issue of Business Week, “
The Best Places to Launch a Career” by Lindsey Gerdes. See their list of “Fifty Employers with the Right Stuff.”

Marc Cangemi, son of
FEI’s Immediate Past President and CEO Michael P. Cangemi, is on the Cover of BusinessWeek, standing tall in the midst of his colleagues from Ernst & Young, dressed in NASA gear under the headline: “Launching Your Career? Discover 50 Companies with The Right Stuff.” Congrats to the Cangemi family. Michael P. Cangemi returned to lead the company he founded, Cangemi Company LLC, and is currently a Senior Advisor to FEI. He can be reached at

BusinessWeek writer Gerdes quotes E&Y auditor Mark Kappelman, 24, who said: ‘It's a very uphill learning curve in the first year. They throw a lot of responsibility at you.’" Gerdes noted that Kappelman told her, “senior-level access is typical for new hires as well, and was one of the things that helped him handle all the duties he received in his first few months on the job.” Kappelman’s statement will sound familiar to those who have worked or continue to work in the audit profession, and is relevant to considerations of human capital, training, supervision and audit quality. Issues like training were among those considered by those surveyed on which the ranking was based. In related news, the Treasury Advisory Committee on the Auditing Profession
(ACAP) announced it is holding a telephonic meeting (which will also be webast) on Sept. 26.

The article immediately preceding the cover story in Business Week, “
Global Accounting Rules: Simpler, Yes. But Better?” (title in hard copy version: “A Better Way to Keep the Books?”) by David Henry, reflects on the impending move to IFRS in the U.S.

“Junking the U.S. rules, known as generally accepted accounting principles or GAAP, would have seemed preposterous a decade ago,” says Henry. “But GAAP has gotten so unwileldy that it has all but collapsed under its own weight,” he adds, noting PwC has observed US GAAP spans 25,000 pages, whereas IFRS spans 2,500 pages. Henry quotes FASB Chairman Robert Herz saying, “I believe its better to create something new than to patch up something old and outdated.” He also quotes survey results from Jack Ciesielski of The Analyst’s Accounting Observer on the spread between IFRS and US GAAP based earnings as reported by companies in 2006. Note: Ciesielski’s survey results were based on information provided in reconciliations from IFRS to US GAAP by foreign private issuers for their 2006 results; those reconciliations are no longer required based on an SEC rule passed in Nov. 2007.) (See also our note about SEC Deputy Chief Accountant Julie Erhardt’s questions raised relating to such survey results in our
earlier post on an SEC’s Aug. 4 IFRS-GAAP roundtable.

FEI member William T. Keevan, senior managing director in Kroll’s Forensic Accounting and Litigation Consulting practice, was also interviewed by Henry for the article. Henry notes, “Companies could also better analyze cross-border acquisition opportunities, says William T. Keevan, a forensic accountant and director at consultant SRA International and at for-profit school DeVry." Keevan is a member of the Corporate Roundtable on International Financial Reporting (CRIFR) which FEI was a charter member of, and also serves on FEI’s Committee on Government Business.

BusinessWeek writer Henry also notes that a move to IFRS “would be a boon for accounting firms, which will guide companies through the new system – not unlike the frenzy of activity for technology firms leading up to Y2K.” Others interviewed in the article include GW Univ. Law School Professor
Lawrence A. Cunningham.

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