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Subprime Mess Fueled by Crack Cocaine Accounting: Jonathan Weil Commentary by Jonathan Weil - Jul 25, 2007 July 25 (Bloomberg) -- Back in 1998, as the subprime- lending industry imploded, critics blasted the loose rules that allowed profits to be booked under ``gain-on-sale'' accounting - - the financial world's equivalent of crack cocaine. While the rules got a few patches, they stayed largely intact, and most investors forgot the whole mess. Nine years later, the subprime world is imploding again. One difference now: The folks who write U.S. accounting standards say they want to redo the rules, insisting that their desire predates the current debacle. Whatever the impetus, it's about time. If you had to list the culprits for the subprime-mortgage mess, the Financial Accounting Standards Board would be a good place to start. Under its rules, lenders that sell blocks of loans to certain types of off-balance-sheet trusts are allowed to take the loans off their books and record immediate profits. Often, the gains are permitted even if the lenders still bear risks of losses on the loans, and even if they still hold influence over the trusts' activities. That's not how it was supposed to work. In principle, under the Byzantine standard known as FASB Statement No. 140, lenders are supposed to surrender control of the loans before recognizing gains, and the lenders' interests in the trusts are supposed to be passive. In practice, however, the rules are so full of exceptions that the broad principles have little meaning. ``Our experience indicates that Statement 140 is broken,'' says
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