Browning has a big (1,350-word) piece in today’s New York Times on something
known as "gain on sale accounting" in the subprime mortgage indusry.
Browning makes it clear that such accounting treatment is decidedly dodgy, and
she even mentions Enron.
To read Browning’s account, New Century Financial, and other subprime mortgage
originators, were booking future income as present earnings, were hiding losses,
and were manufacturing earnings out of thin air – all through the use
of gain-on-sale techniques.
But no one should read Browning’s account without reading Tanta’s
gloss on it. Tanta is a mortgage expert, and she gets increasingly puzzled by
assertions and contradictions in Browning’s piece. Eventually she concludes
that the real problem at New Century was not devious accounting at all: it was
simply the fact that the company didn’t have sufficient loan-loss reserves.
On the evidence only of these two pieces, I’m tempted to agree with Tanta rather
than Browning. On the other hand, Browning has clearly talked to experts who
think that there was an accounting problem at New Century. It’s possible that
there was indeed a problem, but that she just didn’t explain it very well. Maybe
the FT or WSJ will pick up the story and try to get to the bottom of it.