FASB 140 and the Random Walk

We know that mortgage giants Fannie Mae and Freddie Mac posted sharp declines today. And we are told -- though we don't really know -- that this drop pulled the financial sector and even the broader market lower as well. We are also told that the reason for Fannie and Freddie's decline was an innocuous statement by a Fed official and a report by an analyst about a looming accounting change.

The whole business is odd. But it's the last bit that makes me wonder about the stock market.

The Fed official at issue is San Francisco Federal Reserve President Janet Yellen. She said, according to the AP: "My expectation is that market functioning will improve markedly by 2009. But things could get worse before they get better." On the other hand they could get better before they get worse. Either way, it's not much of an analysis and hardly news, even if Yellen is yellin' for her fellow Fed Reservers, which she isn't (see footnote 1 of her remarks).

The second blow to the Mac-daddies was a report by Lehman analyst Bruce Harting, which said that if a proposed change to accounting standards occurred, the companies could find themselves billions of dollars short of capital requirements, and they'd need to raise untold billions to get in line.

But Harting also said that the accounting powers would never let that happen. I guess some investors believed the warning but not the caveat (a warning about the warning) and dumped shares. But the real oddity is that the accounting rule -- FASB 140 -- has been brewing since at least 2000. The rule would require financial services firms to move off-balance sheet securitizations to their balance sheets.

We are told by Random Walk Theory that the market fairly values stock because all the pertinent information is priced in. But today investors were spooked, it seems, by a possible accounting change nearly a decade in the making. Everyone knows that Fannie and Freddie (and many other financial firms) keep their securitizations off-book. Why didn't they see it coming and price it in well before Harting raised his flag?