It appears that Freddie Mac has made some significant changes to its accounting system, to the tune of 2.6 billion dollars.

“They put a lot of lipstick on this pig including several accounting changes that have given them a one time step-up,” said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York.

Only they are implicitly backed by the taxpayers.

Once again, it’s, “Level 3 assets, a category that indicates the holdings are so illiquid that they can only be priced using the firm’s own valuation models.”

There’s that word again, illiquid. And it’s the valuation model for level 3 assets that got us into this mess.

They’ve just found a pile of crap, and concluded that there is a pony beneath.