Abacus Bank: The Fighters

Even the smallest victory is never to be taken for granted. Each victory must be applauded, because it is so easy not to battle at all, to just accept and call that acceptance inevitable.

       --Audre Lorde

Mr. Sung, I'm glad they pick on you, cuz you're a fighter.

--from the just released Steve James documentary, Abacus: Small Enough to Jail

Thomas Sung, founder, Abacus Bank

Of the many dire things I've found, thought and written about on EM08, until now there's been little sunshine. Thanks to the great Gretchen Morgenson, as dogged and principled a journalist in the msm as there is - particularly in regard to EM08 - I first learned of the tale of Abacus Bank.

When my initial EM08 research began, no less than Meredith Whitney came into my awareness, and I remember her ominously forecasting how what the government was doing was "saving" the system, but punishing and destroying community banks and credit unions.

In 1995, megabanks — giant banks with more than $100 billion in assets (in 2010 dollars) — controlled 17 percent of all banking assets. By 2005, their share had reached 41 percent. Today, it is a staggering 59 percent. Meanwhile, the share of the market held by community banks and credit unions — local institutions with less than $1 billion in assets — plummeted from 27 percent to 11 percent. 
-The Institute for Local Self-Reliance 

I wrote to Abacus to offer encouragement, and Jill Sung, founder Thomas' daughter and CEO, replied. That correspondence follows below. What's heartening is that Steve James, award winning filmmaker (Hoop Dreams, Life Itself, among others) has undertaken the task of telling the Abacus story, in a doc that evidently is knocking out audiences.

My mind's racing with a torrent of thoughts and emotions:

• At the top, and as usual, there's outrage watching Uncle Scam pick on the small guys while rewarding the biggest psychotic crooks in history.
• As a minority community bank, Abacus' David vs. Goliath story takes on magnitudes of importance, given how crazy America's racial history is.
• An ironic EM08 observation: one of the most infamous EM08 weapon of destruction's name? Abacus. Who were the architects? In the main, Goldman and John Paulson. BILLIONS stolen, with Paulson alone netting a billion and Goldman in eating its own customers, made hundreds of millions. This is what my country has devolved to, a cesspool of crooks with "deals" that, to anyone with a shred of fairness and decency, reads like something out of Abbie Hoffman's Steal This Book for the vampire bureaucrooks. Forget innovation or entrepreneurship. No, let's just erect endlessly opaque bureaucrookery so we can feed off of the helpless, the small, the weak. Here's the REAL enemy, folks. It's not middle eastern, it isn't la cosa nostra, it isn't the Crips or Bloods. No less than Reuters has a highlight reel here.

Those who endure my endless ranting about these psychopaths deserve a break; here's a heretofore unseen ray of sunshine, some great Americans, heroes, really, sticking to their guns.

Abacus: Small Enough to Jail. Can't wait to see it. Our correspondence follows, but in a moment of serendipity, this first short piece, courtesy of Creatomic/Medium, just came to my attention, and deserves a place as preface. It makes me think of the many sacrifices my family went through, just so I could be here, blogging this... it aptly sets up the Sung's battle, while illuminating their resilience, courage and old school values.

Stop telling each other it’s alright. Sometimes, it’s just not.

People’s lives fall apart in a splinter of a second, their dreams get destroyed, they discover that their bodies have been hiding a disease that’s only getting worse.

Businesses fail, and products crash, and people who love other people get their hearts broken, and people who would give anything to succeed wait for their ships to come in long after they’ve lost the strength or the energy to do anything about it.

What’s the first thing we say to each other, when something goes wrong? What’s the first thing we say when the world gets turned upside down, when all of the shit and the tough times and the breakdowns come?

We say, “it’s alright.”

“It’s alright.”

And that’s a default reaction, it’s the first thing that comes out of our mouths, often. It’s the only assurance we can think of, and the only way we often know how to respond to awful things that seem so far out of our control or influence.

“It’s alright.” Or its alternative, “It’s going to be okay.”

But in the end, a great many things never turn out alright. A great many things just aren’t okay. And saying they are, trying to fool ourselves and the people who need us into believing that it’s all a blip on the radar, it’ll all be sorted out — that’s not helping.

Do you know why?

We know it’s just not true.

People don’t want to hear that everything is alright, when they know — deeply and painfully — that it isn’t. They don’t want to be lied to, even if it’s in the nicest way possible.

All they want is for us to be near. Be open. Be awake and willing to listen. Be patient. Be understanding. And most of all, to just be there. Because the greatest gift you can ever give to someone who is mourning a tragedy, a business disaster, anything — is to ensure that they aren’t alone.

That’s why people in a time of crisis often scream out for help or for companionship. It’s not because they want the rest of the world to solve their problems; they understand that nobody has a magic wand. It’s because they want the simple comfort of knowing that they do not walk in isolation when they’re in need.

We don’t want our pain to be minimized.

Because that’s what happens, when we’re told it’s alright. We feel like we’re over reacting, because if everything really is alright — we ask, why are we feeling so much pain, and what is the root and the cause of it, and are we even entitled to our pain?

We want the enormity of our disasters to be recognized by the people around us, so that we know that what we feel isn’t a trick of our hearts and our minds — it’s a reality. And it sucks, and it’s acceptable to feel like it sucks.

Life really does go on.

It does. And sooner or later, no matter what our struggle is, we start to understand that. And sooner or later, things do feel as alright as they ever can, without ever being the same. Life finds a way, in every nightmare, and life keeps on going. But the way we get there is long and hard, and we need other people to be patient and to walk with us, in silence if need be.

I remember in one of the roughest periods of my life, when it felt as though more things were ending than could ever begin again — I was floundering and struggling and I could barely keep my head above water.

My partner, Emily, told me this.

“I’m not going to say it’s alright, because I know it’s not. And it might never be. But I’m always going to be here, whether you like it or not, to make the best of it, even if that’s not much. I promise.”

5 years later, I’m happier than I ever thought possible. I got through things that seemed insurmountable. I got through things by recognizing that they just weren’t alright. And they weren’t okay.

If your startup fails? It’s not alright. But you can get through it.

If your freelance career bombs? It’s not alright. But you can get through it.

If your relationship comes to an end? It’s not alright. But you can get through it.

If your dreams burn out? It’s not alright.

But you can get through it.

July 23, 2015

Thomas Sung

Jill Sung

Vera Sung

Abacus Federal Savings Bank

via: onlinebanking@abacusbank.com

Dear Thomas, Jill & Vera Sung,

As an Asian-American whose grandparents came to this country with nothing, I, and all of my cousins – over 25 of them – are testament to their and our parents' sacrifice for the better good, the big picture … the future. It's difficult to reconcile my family's history and the America of my youth with the America of today. When the events of 2008 occurred I was blindsided, but the history major in me was determined to find answers. Soon, Michael Lewis, Matt Taibbi, Nomi Prins… and Gretchen Morgenson, would broaden my view of what I call “EM08”: the economic meltdown of 2008.

So it was with this background I came upon Abacus Bank's story – I wish I could say that I was surprised, but no less than Meredith Whitney, years ago, predicted the woes for smaller lending institutions. What was so interesting to me was the way in which our legal system is front-loaded as a financial dis-incentive for small businesses.

Isn't it remarkable, what the America of my grandparents has devolved to? The last presidential campaign set a new fund record of over a billion dollars, and the 2016 circus will set yet another; some analysts forecast a new high of $2 billion. No clearer message to everyday, working class Americans (and the world) exists.

Yes, it's entirely fixed on behalf of the wealthy, but what can we do? Be decent. Your fellow New Yorker, Spike Lee, popularized the slogan, “Do the Right Thing,” and it's something my family was steeped in. The storm is coming, and while the practical necessities of protecting ourselves are in play – what finance calls “hedging” – I'm convinced that having principles and a morality based upon decency is at the core. It's like William Holden's Pike Bishop says in The Wild Bunch: If you can't do that, you're like some animal. You're finished. We're all finished.

This is why I am writing to you; KEEP YOUR HEAD UP. I was very proud listening to your story, and for what it's worth, want you to know that the great silent majority of decent Americans are out here. People like my ancestors and you are what this country used to stand for, and it's needed now more than ever. Don't ever let go of that.

Very truly yours,

JP Kaneshida

Los Angeles

8/3/15

Dear JP,

Thank you so much for your below email!  We are very fortunate to have supporters like you and we are proud to share a heritage of immigration, hard work and entrepreneurship with you.     

I am impressed that you have taken the time to understand what caused EM08.  The causes are numerous but the effects were devastating for small banks like ours where the resulting regulation created to stop the harms caused by big banks, ended up choking small community banks.  The ironic result is that we now in an even more dangerous situation than before –  more power concentrated in the monetary system in the hands of few.  

They say “that which does not kill us makes us stronger.”  This is a mantra my family and I have repeated over and over to ourselves these past several years.   Now with the trial over, we are focused on just that – rebuilding our small institution to make it stronger to meet the many challenges that still face us.  We feel that we have no choice but to continue to fight this fight and feel blessed that we have been given this opportunity to do this.

I hope we will be able to meet in person one day.  Until such time, we wish you and your family  peace, good health and success in whatever you do.

Best Regards,

Jill Sung

CEO & President

Abacus Federal Savings Bank

Great Americans: Vera, Jill & Thomas Sung

Finally...?

The CRAs are FINALLY going to be scrutinized beyond the dog and pony show that was put on over a year ago. BUT, just as Andy Cuomo was limp-wristed then, if you read this article you get a sense that they STILL don't know what to go after them for - or an even scarier scenario, won't. Even after having incriminating circumstantial evidence about that jerkoff Shin Yukawa - god, why does he have to be Japanese??? - they didn't take care of the basic problem of fraud as a result of the conflict of interest arrangement that is the way the CRAs are paid - by the banks themselves - that is at the heart of this entire disaster that is EM08.

And it's even money - at best - that they will nail them or the banks.

Any pretense to hope is long gone with this administration and for that matter, all of these politicians, who, day by day, are killing us, and not so softly anymore. My, if Enron, Andersen, Worldcom, Global Crossing... are ancient history, it's no wonder that no one remembers "Deep Throat"'s dictum of follow the money.

I'm also a bit surprised that Gretchen Morgenson, who contributed to this article and is one of the journalists/analysts I advocate reading, isn't harping on this, one of the most fundamental contributors of the escalation of the dark derivatives market.

Last, words are important; notice the title and the portion, "Prosecutors ask..." Excuse me??? Since what snowy day in hell did lawyers ask in opening a case, particularly prosecutors? They accuse and allege, yes, but... ask? What is this, Miss Manners?

"Excuse me, Mr. Blankfein, but did you pay for your ratings, and could you please pass the pate'?"

http://www.nytimes.com/2010/05/13/business/13street.html?hp

May 12, 2010
Prosecutors Ask if 8 Banks Duped Rating Agencies
By LOUISE STORY
The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office late Wednesday night notifying the banks of his investigation, spokespeople for Morgan Stanley, Credit Suisse and Deutsche Bank declined to comment. Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Mr. Yukawa did not respond to requests for comment.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

Banks were put on notice last summer that investigators of all sorts were looking into their mortgage operations, when requests for information were sent out to all of the big Wall Street firms. The topics of interest included the way mortgage securities were created, marketed and rated and some banks’ own trading against the mortgage market.

The S.E.C.’s civil case against Goldman is the most prominent action so far. But other actions could be taken by the Justice Department, the F.B.I. or the Financial Crisis Inquiry Commission — all of which are looking into the financial crisis. Criminal cases carry a higher burden of proof than civil cases. Under a New York state law, Mr. Cuomo can bring a criminal or civil case.

His office scrutinized the rating agencies back in 2008, just as the financial crisis was beginning. In a settlement, the agencies agreed to demand more information on mortgage bonds from banks.

Mr. Cuomo was also concerned about the agencies’ fee arrangements, which allowed banks to shop their deals among the agencies for the best rating. To end that inquiry, the agencies agreed to change their models so they would be paid for any work they did for banks, even if those banks did not select them to rate a given deal.

Mr. Cuomo’s current focus is on information the investment banks provided to the rating agencies and whether the bankers knew the ratings were overly positive, the people who know of the investigation said.

A Senate subcommittee found last month that Wall Street workers had been intimately involved in the rating process. In one series of e-mail messages the committee released, for instance, a Goldman worker tried to persuade Standard & Poor’s to allow Goldman to handle a deal in a way that the analyst found questionable.

The S.& P. employee, Chris Meyer, expressed his frustration in an e-mail message to a colleague in which he wrote, “I can’t tell you how upset I have been in reviewing these trades.”

“They’ve done something like 15 of these trades, all without a hitch. You can understand why they’d be upset,” Mr. Meyer added, “to have me come along and say they will need to make fundamental adjustments to the program.”

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. “The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,” one former rating agency employee said in an interview, referring to collateralized debt obligations.

A central concern of investors in these securities was the diversification of the deals’ loans. If a C.D.O. was based on mostly similar bonds — like those holding mortgages from one region — investors would view it as riskier than an instrument made up of more diversified assets. Mr. Cuomo’s office plans to investigate whether the bankers accurately portrayed the diversification of the mortgage loans to the rating agencies.

Gretchen Morgenson contributed reporting.

Prelude to a Miss

With the AIG bonus scandal dominating headlines, the pundits are out in full force. Tonight's The Daily Show and Charlie's (Rose) show were no exceptions. What was interesting about the Rose show was his roundtable choices: NYT's Gretchen Morgensen (one of the mass media pundits who called the real estate debacle and "Fannie Mac"'s role), analyst Meredith Whitney (who was the only one in print to call out Citigroup's house of cards last year, and, a'la' her 3/11/09 WSJ article, Credit Cards are the Next Crunch, is correctly pointing to the next catastrophe), Fortune's Sr. Ed.-at-Large, Carol Loomis, and Former AIG honcho Hank Greenberg (who left amidst scandal, lest we forget).

Loomis was just old, obvious and utterly without any kind of insight, befitting her Fortune pedigree. Of them all, Whitney made the most sense to me. Her analysis of the rush to action as being key to getting us into deeper trouble is right on, as well as the Obama administration not doing its homework. But her best comment was when she said that we ought to give money to the smaller community banks.

I'll have more to say on this but need to view the segment again. For now, smart gal that Whitney.

Burning Down the House

Without a doubt, this world is crazy beyond anything I could have ever imagined as a young man.

In a newsbreak, CBS just announced that the Fed has "taken over" Freddie Mac and Fannie Mae. This will, by the announcer's clarion call, amount to "tens of billions of dollars" that will be paid by me and my fellow Americans.

As far as the government action, this isn't anything new. As David Cay Johnston has pointed out, the scams by corporations working in tandem with bought off government thugs runs deep. The pattern of government run taxpayer bailout really came to a head with the S&L bailout, but then most tend to overlook Lee Iacocca's theft when heading up Chrysler. Here's a Wiki excerpt:

Realizing that the company would go out of business if it did not receive a significant amount of money to turn the company around, Iacocca approached the United States Congress in 1979 and asked for a loan guarantee. While it is sometimes said that Congress lent Chrysler the money, it, in fact, only guaranteed the loans. Most thought this was an unprecedented move, but Iacocca pointed to the government bail-outs of the airline and railroad industries, arguing that more jobs were at stake in Chrysler's possible demise. In the end, though the decision was controversial, Iacocca received the loan guarantee from the government.

I'll say it clearly; this is gambling with the house's money, or, as gambler's say, a freeroll. Pretty remarkable "businessman" eh?

Although Iacocca is credited with Chrysler's resuscitation, not too long ago they ran it into the ground again. Now, it's off the public market, having been swept up in private equity. So, in effect, my money - hardworking Americans' money - went into propping up a huge corporation so that the oligarchs could profit - that is, gamble with our money - and then when they screwed up could bail out, conscience free and with their profits having been extracted and invested into private interests.

Folks, with this new Fannie Mae/Freddie Mac debacle, and as if we weren't before, we are now up shitcreek so far that the future is even more bleak and uncertain than ever before. We've surpassed the stage of gambling, where a hustler who knows the basics can at least know what he's getting into.

Along with all of the other shit that's happened in the past eight years, this isn't gambling, it's something else. It's not even mortgaging because when you get down to it mortgages are gambling as well.

If any of you out there think I'm just being hyperbolic, think again: between Fannie Mae and Freddie Mac, they control over FIVE TRILLION in loans.

We are truly in unprecedented times, folks.

And perhaps the worst part? Aside from the fact that we're now laying the hugest pile of crap at the feet of future generations, if I had to bet, no one's going to lift a finger to stop the ongoing slaughter that's only going to be much more brutal now.

For those who want to at least understand how we're getting screwed, NYT's Gretchen Morgenson has been one of the most high-profile journalists consistently sounding this alarm. Her latest article is sobering, but deserves archiving here if nothing else to prove that I'm not the only one who sees the pain ahead. Back in the day the saying was, "Right On," now all I can muster is "read on."





September 7, 2008
Mortgage Giant Overstated the Size of Its Capital Base

By GRETCHEN MORGENSON and CHARLES DUHIGG
The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as this weekend, came together hurriedly after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.

The proposal to place both mortgage giants, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid. Falling home prices, which are expected to lead to more defaults among the mortgages held or guaranteed by Fannie and Freddie, contributed to the urgency, regulators said.

The details of the deal have not fully emerged, but it appears that investors who own the companies’ common stock will be virtually wiped out; preferred shareholders, who have priority over other shareholders, may also wind up with little. Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives at both companies will be pushed out, according to those briefed on the plan.

While it is not yet possible to calculate the cost of the government’s intervention, it could rise into tens of billions of dollars and will probably be among the most expensive rescues ever financed by taxpayers. The takeover comes on the heels of a rescue of the investment bank Bear Stearns, which was sold to JPMorgan in a deal backed by taxpayer dollars. Already, the housing crisis has cost investors hundreds of billions of dollars.

Both presidential nominees expressed support for the government’s plans to take over the companies. The chief economic adviser to Senator John McCain, Republican of Arizona, who has long been critical of the mortgage giants, said on Saturday that Mr. McCain considered it an unfortunate but necessary step.

Senator Barack Obama, Democrat of Illinois, said as he campaigned in Indiana on Saturday that not acting could place the housing market in further distress. “These entities are so big and they are so tied into the housing market that it is probably true that we have to take steps to make sure they don’t just collapse,” Mr. Obama told an audience in Terre Haute, Ind. But he added that the government needed to take steps to guard against Fannie Mae and Freddie Mac ultimately profiting from the government assistance.

The big question now is whether the federal government’s move to take over Fannie and Freddie will restore investor confidence in the nation’s credit markets, help stabilize the stock market and keep loans flowing to creditworthy borrowers.

Fannie and Freddie, by buying mortgages, provide banks and other financial institutions with fresh money to make new loans, a vital lubricant for the housing and credit markets.

As a result of the government’s intervention, the cost of borrowing for Fannie Mae and Freddie Mac should decline, because the government will be standing behind their debts. Equally important, because the government is backing the companies, their buying and selling of loans will continue.

But the plan to bail out the firms will probably do little to stop home prices from falling further. And foreclosures are almost certain to rise.

Just a week ago, Treasury officials were still considering a wide variety of options for Fannie Mae and Freddie Mac, ranging from doing nothing to taking over the companies completely, according to people with knowledge of those discussions.

The Treasury secretary, Henry M. Paulson Jr., who won authority from Congress last month to use taxpayer funds to bolster the companies, always maintained that he hoped never to use that power. But, as the companies’ stocks continued to languish, some within the Treasury Department began urging Mr. Paulson to intervene quickly.

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 firm’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.

Representatives of both companies did not return calls or declined to comment.

On Friday, executives from Fannie Mae and Freddie Mac were ordered to appear in the offices of their regulator, James B. Lockhart, in separate meetings, and were told that the Treasury Department was exercising its authority to place the companies in conservatorship, which would allow for uninterrupted operation of the firms but would put them under the control of Mr. Lockhart.

The details of those plans continued to be worked out on Saturday, when the Federal Reserve chairman, Ben S. Bernanke, Mr. Paulson, Mr. Lockhart and key company executives met in Washington.

While Freddie Mac’s accounting woes make it easier for regulators to force the company into conservatorship, there was more resistance from Fannie Mae, according to people familiar with the discussions. However, given Fannie Mae’s declining financial condition, and the fact that even a slightly pessimistic statement from Mr. Paulson about the company’s finances would be likely to send its stock price into a tailspin, the company has few options but to concede to the government’s demands.

Both companies have the option of challenging the conservatorship and asking for a judicial review. Such a move, however, would probably be disastrous for their stock prices.

Accusations of improper accounting are not new for either company. Earlier this decade, both companies paid large fines and ousted their top executives after accounting scandals.

Freddie Mac’s current chief executive and chairman, Richard F. Syron, joined the company in 2003 after the former managers revealed they had manipulated earnings by almost $5 billion. The following year Fannie Mae’s chief executive, Daniel H. Mudd, was promoted to the top spot after that company was accused of accounting errors totaling $6.3 billion. People familiar with Treasury’s plan say that both men, as well as other top executives, will be forced to leave the companies.

The accounting issues that brought so much urgency to the bailout appear to center on Freddie Mac’s capital cushion, the assets that regulators require it to keep on hand to cover losses.

The methods used to bolster that cushion have caused serious concerns among the companies’ regulator, outside auditors from Morgan Stanley brought in by the Treasury Department and some investors. For example, while Freddie Mac’s portfolio contains many securities backed by so-called subprime and alt-A loans, which are one step up from the riskier mortgages, the company has not written down those loans’ values to reflect current market prices.

Executives have argued that because they intend to hold the loans to maturity, they need not write down their value. But other banks and financial institutions have written down the value of those securities, even if they continue holding them, under “mark-to-market” accounting rules. Freddie Mac holds roughly double the securities that Fannie Mae does.

Freddie Mac and Fannie Mae have also inflated their financial positions by relying on deferred-tax assets — credits that the companies have built up over the years that can be used to offset future profits. Fannie maintains that its worth is increased by $36 billion through such credits, and Freddie argues that it has a $28 billion benefit.

But such credits have no value until the companies generate a profit — something they have failed to do over the last four quarters, and something that is increasingly unlikely within the next year. Moreover, even when the companies’ profits soared, such credits were often unusable because the companies also had large numbers of affordable housing tax credits, which themselves offset profits.

One analyst estimates the companies, in the future, would have to collect roughly double the profits of the past five years for the credits to become usable. Most financial institutions are not allowed to count such credits as assets in the manner used by Fannie and Freddie.

Regulators and auditors may question the companies’ use of deferred-tax credits because they cannot be sold to anyone else and they would disappear in a receivership. And, if those credits were not counted as assets, both companies would probably fall below the capital threshold they are required to hold.

Finally, regulators are said to be scrutinizing whether the companies were trying to manage their earnings by maneuvering the timing of reserves set aside to offset losses from defaulted loans. Each quarter, both companies have gradually increased their loss reserves — Fannie’s reserves today stand at $8.9 billion, and Freddie’s at $5.8 billion. However, regulators and auditors felt strongly that both companies should have identified larger potential losses immediately, and set aside much more from the beginning.

Other companies, like private mortgage insurers, have identified much larger losses and have set aside much larger amounts of capital. Fannie and Freddie, however, have delayed the recognition of such losses, dribbling out bad news with each quarterly announcement, suggesting a strategy to manage the recognition of losses.

Finally, regulators are concerned that the companies have mischaracterized their financial health by relaxing their policies on when to recognize a loss on a defaulted loan, according to people familiar with the review. For years, both companies have effectively done that when a loan is 90 days past due. But, in recent months, both companies said they would extend that to two years.

As a result, tens of thousands of loans that previously would have been marked down have maintained their value. The companies have injected their own capital into pools of securities, arguing that new business policies are helping greater numbers of borrowers.

Under conservative accounting methods, such a change in policy should not have any impact on the companies’ books. However, people briefed on the accounting inquiry said that Freddie Mac may have been using their new policy to delay recognition of losses.

“We have just had to nationalize the two largest financial institutions in the world because of policy makers’ inaction,” said Josh Rosner, an analyst at Graham Fisher, an independent research firm in New York, and a longtime critic of the government-sponsored enterprises. “Since 2003, when these companies’ accounting came under question, policy makers have done nothing. Even though they had every reason to know that the housing market’s problems would not be contained to subprime and would bring down the houses of Fannie and Freddie.”

Reporting was contributed by Stephen Labaton and Edmund L. Andrews in Washington; Jeff Zeleny from Terre Haute, Ind.; and Elisabeth Bumiller from Colorado Springs.