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Banana peels are all over the road to economic recovery
By CHRIS LESTER
Columnist

The tweedy types tell us we're in an economic recovery, whether we feel like it or not. But it sure seems awfully easy to find banana peels on the road to recovery.

Here are just two of my favorites from recent weeks.

First, consider the accounting shenanigans at Freddie Mac.

Am I the only one who is appalled at how blithely we have accepted the fact that one of the biggest financial institutions on earth has been misleading investors in recent years?

A couple of weeks ago, the giant mortgage financier released an internal investigation that concluded top executives used a variety of accounting strategies to manipulate earnings. All told, the misstatements amounted to roughly $7 billion over several years.

Put most simply, Freddie Mac was making too much money during the recent housing and refinancing boom to deliver smooth earnings growth over time to investors on Wall Street. So Freddie devised arcane ways to make itself seem less profitable now while creating a reserve to report more earnings later.

This isn't small potatoes, folks.

Freddie Mac, a $600 billion institution charged with enhancing liquidity in the housing market, currently owns or insures roughly 20 percent of all mortgages. Although it is a publicly traded company, as a "government sponsored enterprise," it benefits from rather lax regulatory oversight. Moreover, Freddie benefits from implied government backing of its bonds, arguably exposing taxpayers in the event of a meltdown that would require a government bailout.

Does anybody care? Not much, it seems. We appear to be taking comfort in the fact that Freddie was hiding good news from investors.

But we should care, particularly in the current corporate accounting climate. The nation's fourth-largest financial institution has openly admitted to misleading the investing public. And if Freddie lied about its financial condition during good times, just imagine how it might have behaved if things turn south.

My second-favorite banana peel on the road to recovery is a mushrooming shortfall in corporate pension plans.

By some estimates, the so-called defined benefit pension system is as much as $350 billion short of meeting its obligations to roughly 44 million workers covered by such plans.

The growing shortfall is beginning to get some attention in Washington, D.C. The Pension Benefit Guaranty Corp., which insures private pensions, recently was placed on a list of "high risk" government agencies. There are even early stirrings about the need for a government bailout that could exceed the savings and loan crisis in its scale.

How is the business community responding? For the most part by lobbying for accounting changes that would actually reduce their obligations for funding pensions, at least in the near term.

One argument put forth in favor of such changes is that increasing business obligations to fund pensions right now would impair corporate profits at a sensitive time in the economic recovery. Moreover, the pension shortfall could magically shrink if the value of the stocks pension funds invest in would only soar back to the moon, like they did in the late 1990s.

Remember the 1990s on Wall Street? Yeah, me too -- rather nostalgically. But they aren't coming back any time soon.

So, let's see here. On one hand, the financial institution responsible for roughly 20 percent of the nation's mortgage market has been cooking the books, even in the best of times. One the other hand, the pension system that covers roughly one in three of the nation's workers is massively underfunded.

Banana peels. Everywhere you look there are banana peels on the road to recovery.