Here is today’s intriguing article from late yesterday: Bloomberg’s Jonathan Weil explains why the Fed does not follow GAAP. This sets up a situation where the Fed books regarding Bear Stearns are ripe for creative accounting.
"The Federal Reserve is just days away from completing the financing for its bailout of Bear Stearns Cos., after which the central bank will have another big decision to make: how to account for it.
Flip through the footnotes to the Fed’s latest annual report, and you’ll come across an open secret. The Fed doesn’t follow normal accounting rules, as promulgated by any of the major standard-setting boards. Rather, the Fed writes its own, in a document called the Financial Accounting Manual for Federal Reserve Banks.
If you ever wanted to design an accounting regime to help a bank cook its books, the Fed’s would be perfect. This doesn’t exactly inspire faith in the U.S. financial system, at a time when a good example might help a lot.
Imagine if there were no rules specifying when a bank must bring an Enron-style special-purpose entity onto its own balance sheet. The Fed’s accounting manual has none. Now picture an accounting system where a bank never had to recognize losses on any securities it holds, as long as it continues holding them. That, too, is the Fed’s policy."
Now, before the Fed got involved in the
rescue orderly liquidation of Bear Stearns, their accounting practices were not a big
deal. Since the vast majority of the Fed’s assets are U.S.
government securities, they can — "Hey, What the Hell! — change their value by changing interest rates.
But these are very different assets; its a very different question as to how to account for them . . .
Fed’s Bear Stearns Books Look Prime for Cooking
Bloomberg, June 18 2008