Saturday, December 19, 2009

Q&A Part III: Interview with Michael Rapoport

Q5. Take one of the stories you mentioned above, explain how extensive was the reporting before you sat down to write? How many people did you talk to? Who were they? What kind of documents did you read?

A: Assuming that we're using the Freddie Mac column that we've talked about: A lot of the answer to this question we've already spoken about or should be in the answers to the previous questions, but basically that column came about because I had previously forecast that Freddie would have to write down its deferred tax assets, for the reasons we've discussed. When they did so, I noticed that there was a substantial chunk of deferred tax assets they WEREN'T writing down, and the reason they gave was that they were related to losses on securities that they expected to recover, and thus they thought they could still use the deferred tax assets; thus they still had value and the company wasn't required to write them down.

As it happened, I had also written about the issue of these securities losses that the companies thought would recover, and I knew that they were unlikely to recover - both because they'd already lasted a long time (more than a year) and because a lot of them are related to mortgage-backed securities and other bad assets that are unlikely to come back.

From there it was really just a matter of confirming my suspicions with a couple of accounting experts. As a columnist, what I'll often do is find something that I THINK is valid, but accounting is so complex that I like to run my hypotheses past experts in the field, to make sure that what I think I'm seeing is accurate. I also go back to the securities filings - in this case the company's latest 10-Q quarterly report - to get a fuller picture of their position, as well as the numbers that are critical to my argument. In this case they said, "Yup, that's it" - so that even though I didn't quote any of them in the story, I could put forth my opinions with the confidence that they were valid.

In the process of doing all this, I found that Fannie Mae, Freddie's fellow mortgage-finance giant, had done something much like Freddie, on a smaller scale. They had written off something like $21 billion in deferred tax assets. while keeping $4.6 billion, using the same reasoning as Freddie. (Again, look at the story itself for the correct figures; I'm just using the figures I remember off the top of my head.) So it was only fair to include them in the story as well.

From there, it was simply a matter of calling the PR spokespeople of the two companies to give them an opportunity to comment, and to write all this up in a way that would make it clear to the average reader - which can be pretty tough in itself sometimes when you're dealing with complicated accounting topics.

To be continued...

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