Wednesday, July 23, 2008

Shady Accounting: It's Not Just the Private Sector

In 1938, when Fannie Mae got started, it was originally a government agency endowed with the authority to buy mortgages, in the hope that this would expand the supply of credit to homeowners. It wasn’t until 1968 that Fannie was privatized. (Freddie Mac was created two years later, and was private from the start.) The main reason for the change was surprisingly mundane: accounting. At the time, Lyndon Johnson was concerned about the effect of the Vietnam War on the federal budget. Making Fannie Mae private moved its liabilities off the government’s books, even if, as the recent crisis made clear, the U.S. was still responsible for those debts. It was a bit like what Enron did thirty years later, when it used “special-purpose entities” to move liabilities off its balance sheet.

The New Yorker, via Greg Mankiw.


At 7/23/2008 3:07 PM, Anonymous Anonymous said...

Just imagine if all those social security liabilities (as well as government pensions) were properly accounted for using the same standards we require of private employers...

At 7/23/2008 4:34 PM, Anonymous Anonymous said...

Social Security and Medicare unfunded liability is $101.7 trillion in today's dollars.

At 7/23/2008 5:57 PM, Anonymous Anonymous said...

Ironic, and not surprising given the state of the U.S. treasury budget, that the government does not want to re-nationalize the firms. I say nationalize; then the taxpayers will own not only the liabilities of the two giants, but the assets as well.

At 7/24/2008 5:37 AM, Anonymous Anonymous said...

Let us not leave the non-profit sector untouched.

As a volunteer, I have seen lots of total mismanagement ie. no budget, no policies aside from the mission statement, checks signed in advance, financial statements not prepared for 3 years, committees with their own bank account that were not reporting their financial activities to the board, failure to charge volunteers who embezzle funds, inadequate asset protection to prevent embezzlement/fraud, etc.

I think my favorite was the charity which ran up a debt of 3.4 Million in 1 year. An investigation was prompted by a corporate donor and the director & the entire board of directors resigned en masse. No charges, and no responsibility for cleaning up the mess.

Next time you give that donation, look for a numbered receipt or ask for a financial statement that is more than a pie graph.

At 7/24/2008 10:54 AM, Blogger juandos said...

My most favorite supposed charity to dis is the United Way...

A truly scurulous and has been for decades...

At 7/25/2008 10:54 AM, Blogger OBloodyHell said...

>> Next time you give that donation, look for a numbered receipt or ask for a financial statement that is more than a pie graph.

> My most favorite supposed charity to dis is the United Way...

Ya beat me to it. I know friends who have told me how, early on when their business was new, they had been approached by one of the "charities" with a scheme that, to him, looked a lot like a technique for laundering money.

Noted SF author J.P. Hogan wrote a short story, contained in one of his collections (sorry, I forget the name of the short story and the book) which specifically detailed out how to create a charity and use it for money laundering, as a part of the protagonist's activities. It was literally a blueprint for how to go about it.

At 7/25/2008 11:04 AM, Blogger OBloodyHell said...

Regarding the general topic, this is no surprise. The governments at all levels specifically exempt themselves from using GAAP (Generally Accepted Accounting Practices), and, as a result, are a magnet for all sorts of chicanery.

I think I've already detailed some time ago on this blog the little trick pulled by the State of NY (my recollected numbers may be off, but the activities are not):

NY State has a law requiring that they have a "balanced budget" each year. One year, they had a shortfall of 250 million dollars. Now, a business would know it had to make cuts, but no, not the State. They had a better idea...

Their idea goes like this --

NY State has an independent bonding agency (not directly a part of "the State Government") which has the job of issuing bonds and collecting monies to be used for State Projects. The agency, apparently, just sells bonds and does not necessarily connect them with any specific project (at least, not in all cases). Hence, they have cash which may not be earmarked for a project.

So, NY sells Attica Prison to the bonding agency for 250 mil, and now leases it back from the bonding agency for 'x' number of dollars a year.

In other words, they fixed their budget problem by putting it on the Visa Card.

So much for the functionality of a "balanced budget amendment" when applied to governments. without GAAP such things are useless.

What we need is a "GAAP Amendment" which requires all governments -- Fed, State, and Local -- to adhere to GAAP. Because it's quite clear that they aren't going to do it otherwise.



At 7/25/2008 5:04 PM, Blogger juandos said...

Hey obh, whenever I'm asked if I contribute to charity my reply is, "yep! Every two weeks"...

This of course raises question of what I'm contributing to...

The taxman of course is the answer they don't consider...

At 7/25/2008 11:26 PM, Blogger bobble said...

lbj was a corrupt politician like all the rest.

but look at how it all started. it came out of the depression. the economy had crashed due to overspeculation and lack of regulation. just where we are headed right now.

the markets do not take care of themselves. some regulation is needed. we would not be where we are now if glass/steagall had been repealed (CLINTON!). or if bush's regulatory negligence had not let the housing bubble go on and on.

your will reap what you sow.

there is going to be massive new regulation because the existing regulation was repealed and ignored.

At 7/27/2008 10:00 AM, Blogger OBloodyHell said...

> it came out of the depression. the economy had crashed due to overspeculation and lack of regulation.

Sorry, bobbie, but you are so woefully wrong on this you are into sophist territory, now.

Virtually EVERY reputable economist will acknowledge to you that the GOVERNMENT, through the Federal Reserve System (as well as through allowing "Fractional Reserve Banking", to a much lesser extent -- which is not "too little regulation" but a specific form of precise regulation, and FRB is the source of a number of substantial economic problems, while it has a lot of benefits as well. I won't discuss that part of the whole Depression mess much).

The Depression was mainly two events -- first was the Stock Market crash, which you and just about everyone knows about. The second, but much, much more serious event -- the one which really turned it from a short, bad time to a true economic disaster -- was the steady collapse of banks over the next several years, and throughout the 30s: 9,000 banks failed.

THIS was what hurt the average guy, far more than the Stock Market crash -- the "average guy", if they lost anything in that, lost paper (the stock market climbed 6x, from 1921 -- DOW @ 64, to 380 in 1929). By 1933, bank depositors lost 140 *BILLION* in deposits (for perspective, average yearly income in 1928 was $750 -- in four years, the banks lost the equivalent of the entire life-earnings of 3 MILLION people)

The Austrians say that the entire reason for the stock market to rise so quickly was because of the Federal Reserve System (created ca. 1913, to prevent depressions) vastly overinflated the money supply, creating too much "easy credit", which triggered the collapse as the natural business cycle finally asserted itself and caused a huge, vastly overdelayed liquidation of the bad investments.

Economists agree, however, that the cause of the extensive bank collapse and the continued worsening of the Depression, as well as its length, was the fact that the FRS followed this massive expansion by contracting the money supply equally excessively -- virtually all sources of credit dried up.

Banks, run on the FRS, lacked access to money they needed whenever more than a few depositors tried to get their money.

Other fun "government" problems have come out of the government "solutions" to THAT problem:

The collapse of the Savings and Loans in the 1980s? S&Ls were a New-Deal creation.

Fannie Mae? New Deal creation.

Still to come:

Social Security, Medicare/Medicaid? New Deal creations.

You see, FDR's advisers were sure they knew better than common wisdom -- that they could outthink the accounting system of the universe, and make things up out of thin air. As you can see, eventually, the accounting system asserts itself, though usually not against the damnfools who f***ed the system up in the first place.

"Government solutions" -- the gift, sorta like *syphilis*, that keeps on giving.


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