Rules are made to be broken, or, at least altered when necessary. Shares in Freddie Mac (FRE) and Fannie Mae (FNM) hit multi-year lows yesterday, falling, at one point, almost 20%. The drop was based to a large extent on a note from Lehman Bros. saying that the two mortgage companies might have to raise a combined $75 billion.

The reason for the stampede out of the stocks is that the Financial Accounting Standards Board may change a critical rule on capital requirements. According to MarketWatch, "the Lehman Brothers analysts also said they believe it is likely Fannie and Freddie would be granted an exemption to the FASB rule change."

The sell-off in the two companies is a nearly perfect anatomy of a panic. In a more forgiving market, a 20% run on news which may not be bad at all would be extraordinary. It this market, a breath of the negative sends investors rushing to the exits.

Among the rules about rules there is no rule that the Financial Accounting Standards Board has to alter its current view of minimum capital requirements. There is also no rule that says it needs to be applied equally in all cases.

Accounting needs to be transparent. The FASB is not going to change that. But, disclosure and havoc do not have to live under the same roof.

The FASB is not going to effectively wipe out the common shareholders at Fannie Mae and Freddie Mac and its is not going to further cripple the US mortgage market. Every wart may have to be uncovered, but they will not all have to be cut off.

Douglas A. McIntyre 

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