Then, last week, advisers from Morgan Stanley hired by the Treasury Department to scrutinize the companies came to a troubling conclusion: Freddie Mac’s capital position was worse than initially imagined, according to people briefed on those findings. The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the companies’s capital resources and financial stability.
Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.
You got that?
Fannie and Freddie both said they had "more capital than any other time" and they were "well-capitalized" - this is from their CEOs - as recently as a month ago.
They lied.
They both engaged in accounting gimmicks to intentionally understate their losses, refusing to recognize them until either 4th quarter or 2009, thereby making them look stronger than they really were.
These two gigantic hedge funds intentionally manipulated their accounting to show a capital position that was stronger than reality, by pushing forward losses instead of recognizing them as they occurred.
While not illegal, it had the effect of lying to the markets, which put both firms at risk of all-on collapse.
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