I have been following, but not writing about the Lehman accounting scandal. Simon Johnson brings up a past scandal (Enron) and a future scandal (Greece). He points out the role of investment banks in designing and/or executing transactions that are done solely to cook the books.

I saw a lot of this during the S&L crisis, with Freddie Mac and investment banks “helping” underwater thrifts play accounting games, with the thrifts’ regulator cheering us on (I say “us” because I worked for Freddie, although not on these transactions). The incentive of the regulator was to hide the problem until somebody else was in office.

I do not have much useful to say here, except to note that the worst accounting scams tend to come from government agencies and from regulated financial institutions. And as Andrew Ross Sorkin’s column points out in the case of Lehman, the regulator typically knows and seemingly approves of the way that the bank games the system. If the government does not apply honest accounting to itself or insist on honest accounting at regulated/insured institutions, what is the point of accounting standards?

UPDATE: See Jennifer S. Taub on the rule change that spurred the growth in repo financing of mortgage securities.