Financial Accounting Standard 133 was contentious from the outset, and still is. Everybody always knew it would be complex and costly, but it has had much more impressive, unexpected results--notably bringing down the management of both Freddie Mac and Fannie Mae.

What has it meant for the rest of us, especially for those engaged in the hedging-intensive mortgage business? After four years of experience with FAS 133 as a required rule, now is a good time to consider the judgment of the market of financial professionals as to whether it is a success or not.

How does the market rate the effects of FAS 133? Has it made GAAP financial statements more or less useful? Is it worth what it costs? How does the market rate the performance of the Financial Accounting Standards Board in producing the more than 800 pages of this rule and its copious interpretations? Should FAS 133 be kept or replaced?

To answer these questions in a clear way, National Mortgage News Online ran a short and straightforward questionnaire on the topic, which could be answered (of course) online, and which was also sent by e-mail to informed mortgage and financial professionals. The respondents included mortgage bankers, investment bankers, investment and hedging officers, accountants and financial consultants. There were 36 total responses, not a huge number, but the judgments were so nearly uniform that the message is utterly clear.

In sum: FAS 133 gets a D-.

Answers to the specific questions were as follows:

1. Has FAS 133 made financial statements more or less clear?

Less clear: 86%
More clear: 11%
No change: 3%

2. How do the benefits and costs of FAS 133 compare?

Costs greater than benefits: 89%
Benefits greater than costs: 11%

3. Are FAS 133 rules too complex or not?

Too complex: 97%
Just right: 3%

4. What should be done with FAS 133 going forward?

Should be withdrawn or replaced: 63%
Needs major revisions: 31%
Continue as is: 6%

5. What letter grade would you give the FASB for FAS 133 from A (excellent) to E (fail)?

The average grade, as stated, was D-. This was broken down as follows:

A: 0%
B: 0%
C: 9%
D: 41%
E: 50%

Quite a report card!

Respondents were also given the chance to make open-ended comments or suggestions. Some of the more pointed of these were:

"FAS 133 has made annual reports cryptic."

"FAS 133 creates an incentive not to hedge."

"Firms that are traditionally risk averse are not hedging risks they should be hedging. FAS 133 has made financial institutions more risky."

"The requirement to mark only one side of a hedged position is simply wrongheaded."

"The intricate and process-oriented tests for hedge effectiveness need to be scrapped."

"The propensity under FAS 133 rules is to throw out effective hedges."

"The rule has created obfuscation at best, but probably misrepresentation is a better term."

"FASB wants to look at hedging as strictly a micro-hedge concept, whereas most financial firms hedge at the enterprise level. This is a major disconnect between the FASB perspective and reality."

"Our smaller clients are terrified of FAS 133 and our larger clients should be."

"If a transaction is indeed a hedge, then hedge accounting should be required."

"Under FAS 133, conservative accounting means misleading accounting."

"Grade: E. Only an imbecile would answer otherwise."

"FAS 133 is a disaster."

"Disband FASB soon."

It seems clear that after four years these financial professionals are not resigned to FAS 133.

It is a notable historical irony that such a hopelessly flawed accounting rule became the "soft underbelly" of political vulnerability of Fannie and Freddie, long viewed as virtually unassailable founts of the American homeownership dream. The disasters at Fannie and Freddie resulting from their meeting with FAS 133 represent a highly interesting collision of two major government-sponsored efforts. These are leveraged mortgage finance, on one hand; and the elaboration of detailed top-down accounting rules, on the other.

It may seem unfamiliar to think of the FASB as another government-sponsored entity, but it is. The use of its products, however generally opposed they may be, is mandated by the government. Since Sarbanes-Oxley, its funding derives from a statutory assessment, in effect, a tax.

So far the force of the government-sponsored accounting idea is prevailing over the government-sponsored mortgage finance idea--an outcome worth pondering.

For example, the chief accountant of the SEC is reported to have said to Franklin Raines, "Sir, hedge accounting is a privilege, not a right." "Privilege?" "Right?" This is political language, not measurement language. The relevant question is measurement: how to convey through the highly imperfect medium of financial statements a reasonable approximation of the cash reality.

Does FAS 133 succeed in doing this? Our survey is unambiguous that in the judgment of financial professionals it does not. The consensus is that it is time at a minimum for major revisions, if not for FAS 133 to be scrapped altogether and replaced. This is an issue of the highest importance to the mortgage business.

Alex J. Pollock is a resident fellow at AEI.