'Accounting Games' Mask True Financial Pain, Says Housing Seer Rosner

Updated from 10:54 a.m. EDT 

The huge loss announced last night by AIG and Citigroup's pending settlement over auction-rate securities (to be announced later today) show again the credit crunch remains very much alive.

It's likely to get worse before it gets better, says Joshua Rosner, managing director at Graham Fisher & Co., an independent research firm, who predicts national home prices will fall another 13%-15% before bottoming in early 2010, "unless they overshoot."

Rosner, whom Fortune dubbed a "prophet of the credit crisis" for his early warnings about problems in mortgage-backed securities, believes companies are still slow to take losses and are "still playing games" with accounting.

For example, Freddie Mac's dismal results this week would have been even worse if not for $18 billion in deferred tax assets. Rosner says that $18 billion figure is questionable, based on Freddie's own admission in the appendix to its filing: "The company does not maintain a tax basis balance sheet to support deferred tax accounting under GAAP, which could result in balance sheet misclassifications and potential income statement adjustments."

Update: An earlier version of this story mischaracterized Rosner's view on recent agreements where Ambac paid Citigroup $850 million to cancel insurance on $1.4 billion of CDOs, and SCA paid Merrill $500 million to cancel insurance on $3.7 billion of mortgage-backed securities (MBS). The deals were a good thing for the monoline insurers, Rosner says, but also revealed that Citi and Merrill had previously been marking the relevant securities at inflated values.

In the SCA-Merrill agreement, for example, the company received $500 million for terminating hedges on MBS they were previously carrying on their balance sheet at $1 billion, he said. "That's one aspect of the game."  (Tech Ticker regrets the error.)

Rosner says the slowness of management to really take losses is contributing to the market's "manic-depressive" state (heading back to "depressive" Thursday) because investors keep thinking the "worst is over" and then get hit by the next round of announced losses.

(For the record, Rosner does not own or short financial services stocks and his firm does no investment banking.)