A little understood but very important accounting rule being blamed for the $523 bn in losses and writedowns at financial companies around the globe is now being retooled by market and accounting regulators, in a last-ditch attempt to stop the steam pipes bursting and to get banks lending again.
However, the move matters greatly to taxpayers, because analysts now say that banks who own severely damaged mortgage-backed bonds may be able to use the changed rule to get higher prices for these securities if they auction them off to the government as now planned in the $700 bn rescue bill.
The rule change comes just at the end of the third quarter, which means companies may be spared the pain of big third-quarter losses and writedowns.
And it comes as the Federal Bureau of Investigation is probing Wall Street firms to search for criminal securities fraud in the valuation of these bonds.
How it Works
Here's how it works.
When borrowers get loans, the banks typically sell these loans to Wall Street firms, who then repackage them as bonds backed by the value of a house or property. Wall Street then sells these bonds to mutual funds, pension funds and all sorts of investors around the globe.
As house prices drop in value, so, too, do the value of these bonds, which vary in type as mortgage-backed securities, collateralized debt obligations (CDOs), even CDOs of credit default swaps or exotic bonds called CDO-squareds.
The accounting rule says that companies that own these bonds must value these bonds each quarter as if they were going to be sold immediately. That process is called "mark to market."
But since these bonds have dropped in value, they are regarded as Kryptonite because no one wants them.
Companies must then book these losses on these bonds even if they did not sell them. "Mark to market" has since been jokingly called "mark to mayhem" and "mark to madness."
Relaxing the Rules
The Securities and Exchange Commission and the Financial Accounting Standards Board have now "clarified" existing mark to market accounting rules saying companies have leeway in assessing value, and do not have to use the current market price, which is of course way down.
The SEC and the FASB basically say that companies are not required to book fire sale prices when valuing these illiquid assets, including mortgage-backed bonds. Instead, management can use their own internal assumptions to measure fair value.
Specifically, the accounting regulators said that companies were initially supposed to use fair values based on an "orderly transaction" between willing market participants. However, "distressed or forced liquidation sales are not orderly transactions," the SEC said in a statement.
Don't Blame the Rule
It's important to remember here that no one really knows the value of these bonds and whether they are worth more or less than what the market says they are worth because the cash flow is or is not really there.
It's important, too, to remember that it's not just an accounting rule that can be held to blame for record losses, but the fact that banks got themselves into trouble by recklessly giving too many loans to borrowers who either were irresponsible or could not afford them.
It is no small irony that the government's plan essentially is an attempt to put a floor under these bad securities that were written down according to a governmental accounting body's rules.
The question now is whether this accounting rule change will reflect the true value of these assets and whether doing so will force Congress to dole out the full $700 bn--or more--to rescue these assets.
Record Losses
The losses have caused banks to be in violation of their statutory capital requirements, forcing them to raise capital to plug balance sheet holes. The losses are also the reason why a growing number of financial companies have shut down, been forced into mergers, or been nationalized.
And the losses are behind the reason why the Federal Reserve and central banks around the world have pumped record amounts of liquidity into markets, and have pushed the US central bank and the US Treasury to let banks dump their illiquid mortgage-backed bonds for more liquid Treasuries.
The decision by the Securities and Exchange Commission and the Financial Accounting Standards comes as the London interbank offered rate, or LIBOR, hits record highs. Many adjustable rate mortgages--including dodgy no income verification loans and interest only loans--in the US are due to reset to higher interest rates because they are tied to LIBOR, which is the rate that banks in Europe charge each other for such loans.
As more loans go belly up due to the higher rates, that means more losses for banks and financial companies.
The financial-services industry has been lobbying the SEC and FASB for months now to alter the rules, a lobbying that picked up speed in the wake of the new $700 bn Congressional rescue bill that would set up a reverse auction mechanism to let banks unload these damaged bonds onto the government. Congress may include the change in its new version of the rescue plan.
The American Bankers Association had complained to the SEC that auditors were forcing banks to value these bonds at unrealistically low "fire sale" prices, rather than at the higher values the banks believe these bonds should be worth in an orderly market.
There is also some talk in Congress of a temporary or permanent repeal of the mark to market rules to allow for more long-term valuation of assets and loans.
The Problem with the Rule
The problem with this accounting has always been what critics say is its punitive effect.
Companies have to record resulting losses from this mark-to-market exercise, which some say is the equivalent of sticking a finger in the wind, as if they actually lost cash even if they did not actually sell the bonds at all, and even if the cash flows are still coming in higher than what the market says the assets are worth (Fannie Mae and Freddie Mac have said that they are solvent on a cash-flow basis, notes economist Brian Wesbury).
The writedowns taken by some firms have triggered a cascade of writedowns at other companies, as prices are seen to be set in the marketplace. For example, E*Trade last year priced some mortgage-backed bonds at 27 cents on the dollar, triggering writedowns at other firms. Merrill Lynch (MER) sold assets to the vulture fund Lone Star at 22 cents on the dollar (really 6 cents if you consider that Merrill financed 75% of this sale), also causing other writedowns.
JPMorgan Chase (JPM) bought Washington Mutual (WM) at a garage sale price, triggering fresh new prices for assets on its books that triggered anew mark-downs on the assets at Wachovia, which was shephered by the Federal Deposit Insurance Corp. into the arms of Citigroup (C).
Risk to Taxpayers
But the $700 bn rescue plan makes the change potentially more damaging to taxpayers because the relaxation of the accounting rule means banks may be able to keep higher prices on these bonds and then unload them at higher prices at auction to the Treasury.
"It is not in the interests of U.S. citizens and taxpayers to abandon mark-to-market accounting for a proposal in which taxpayer funds are being used," says Janet Tavakoli, founder and president of Tavakoli Structured Finance and one of the best market analysts on the dangers of credit derivatives.
Tavakoli adds: "If we would have to sell the assets at a loss due to downward moves in market prices, we have a right to know that. If the assets have permanent losses so that even if we hold to maturity we would have losses, we have a right to know that too. At any given time, we have a right to know what our ‘investment' is worth."
Tavakoli adds that the danger is that the government's new portfolio managers "can claim they are making money" while "the assets are declining in value due to defaults or permanent value destruction of collateral. This situation can continue for a long time to create the false appearance of profitability.
Tavakoli notes that "in other words, U.S. taxpayers can be told they are making money on their $700 bn investment, when in reality they are losing money. I would rather know the market price, even if the news is bad news."
Loophole Dangerous to Taxpayers in the Rescue Bill
And check out this sentence I've highlighted in italics in section 101 of the new bill, entitled "purchases of troubled assets"--it could also mean even higher costs to taxpayers:
(e) PREVENTING UNJUST ENRICHMENT. In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in Conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code.
This section "probably indicates that JPMorgan Chase can sell the troubled assets of WaMu to the US government and make windfall profits," notes market analyst Richard Suttmeier. "Same for Citigroup with regard to Wachovia's troubled assets. Other future deals as well. That is a direct bailout of Wall Street on the back of taxpayers."
A Better Way
Check out what Tavakoli says is a better way than the $700 bn bailout plan:
"Rather than adopt any form of the Paulson Plan, which uses billions of taxpayer dollars and forces risk and potential losses on taxpayers--instead of those who enjoyed the gains--I advocate an alternative."
"Instead of the Paulson Plan, we can force creditors to accept a restructuring plan (this was done during the Great Depression). Creditors (debt holders) including credit default swap counterparties would be compelled to accept a restructuring plan. That requires partial forgiveness of debt in many cases and/or a debt for equity swap (in which the government takes equity stakes in these companies)."
"If we are determined to violate personal property rights, I prefer it be done through a forced debt forgiveness and a forced capital restructuring (debt for equity swaps), rather than through a massive bailout (any of the various forms of the Paulson Plan)."
"The Paulson Plan destroys capitalism (those who stood to gain--and already made off with large gains--should bear the risk) and violates the spirit of democracy established by the Founding Fathers of the United States."
I lost tens of thousands of dollars in my 401K and personal accounts due to this crisis. I happily participate in this bailout through my taxes if it means I can recover some of those losses. A no vote would not punish the CEOs of those banks as much I would wish it to them. They have secured their money in offshore accounts. It will directly hurt the little people. As for me, it is not just the banks. Whoever bought cars and houses on credit, without being able to repay should also not be bailed out. Brainless people have houses that now have to be payed through taxes from those who act responsibly. There is no constitutional right to max out your credit cards and then be helped when destiny bites back.
October 1, 2008 at 2:50 pm
nunzw
When I was planning for retirement, I made sure my car was paid off, and my one credit card was paid off. Although I worked all my life I never worked for a company that had a retirement plan, or 401K until 8 yrs before I retired. There was not much money in that 401K, and I used it to make repairs on my home. After 6 months of retirement I had to go back to work, SS is not enough, especially since the rise in oil prices spiked my heating and electric bill, and I still had a mortgage to pay. I have been a widow for 18 years and there were times I worked 3 jobs so I could make my mortgage payment on time. DO THESE POLITICIANS THINK I WANT TO BAIL ANYONE OUT??? NOT!!!!Let the chips fall where they may, America will survive, we always have, and just maybe we will be stronger for it. To all the Dems from MA no vote from me, you all need to move on and out of politics since you don't listen to the "folks" anyway. That "bailout bill" is still going to pay big bonus's and golden parachutes for the exec's that caused some of the problem.
October 1, 2008 at 2:42 pm
Bruce
"Mark-to-Market" once elected by a firm must be used, you can't without IRS change jump back to Averaging or other methods. I got the impression from this article that the companies could pick and choose, I don't believe that's correct. Also, on the uptick, "Mark-to-Market" accounting inflates the corp. book value without any real (earned ro realized) change in the actual asset. This is one of the methods exec's can use to cook the books and qualify for large bonuses.
October 1, 2008 at 2:41 pm
Sam
I emailed the last two sections of the article to my Senators and urged them to not support the proposed Senate bill.
October 1, 2008 at 2:33 pm
Jed Clamped
This would benefit MAINLY children who at later ages would be able to tap that fund OR let it build VERY well over their lifetime.
it'e not ESOPs
it's CSOPS - Citizens Stock Option Plan
All hail Kelso !
October 1, 2008 at 2:28 pm
yo mammie
enough with "blaming the homebuyer"! borrowers had mortgage insurance tacked on to their house payment, they had to pay the premiums every month. the bank "handled" the insurance. that's where the problem is. the homebuyer bought and paid his insurance against default, but wall street didn't. they shell-gamed it instead. now the jig is up.
so it's nothing but a massive insurance fraud perpetrated by wall street.
end of story.
October 1, 2008 at 2:23 pm
Jed Clamped
by SSN account, I mean give everyone an account at Goldman keyed on SSN
October 1, 2008 at 2:22 pm
Jed Clamped
I see LIBOR triples as these ARM's reset...
augh! Poor folks... Just days before today - people resetting MIGHT have been saying:
"Ok, we CAN do this, mortgage is $2345"
but with LIBOR at 3x ? the reset I take it then becomes ?
Well, just DAYS ago, that reset probably would have been on top of about 3% LIBOR
now ? it's up nearly 5% riding on about 8. For a decent slide ? chuck in another 5 ?
That's 13% now instead of 8% reset.
ALMOST double.
if you're reset expected when LIBOR was down last week was to be $2500 a month ? Try more like $4250 now !
Heh- housing is going to dump which will furth push prices down.
I say take all the federally funded corporate ventures as of late, and literally turn over the profits - ALL the profits to the taxpayers - dump it into a SSN account.
Let Goldman manage them.
Everyone wins.
Faith, confidence is restored. Who'd want to doubt their nation states corporate assets if they own them ?
Grandma and Grandpa don't become $ feedbags to the next generation.
No one pays into SSN anymore.
that money goes right into the economy.
Makes sense to me.
October 1, 2008 at 2:21 pm
Scott Kirkwood
They can't have it both ways. When housing prices were going through the roof the companies holding these bonds were taking the gains by marking them to market, now that they have went south they want to change the rules.
October 1, 2008 at 2:04 pm
Patrick
Suspend mark to market for a couple weeks and see what happens. I agree with Scott. We may be able to avoid writing a check at all. I have more confidence in the "greedy" Wall Street folks getting themselves out of this rather than congress. What smart financial moves has the Government ever made? I see only trouble coming and a more powerful government if ANY form of bailout is approved.
October 1, 2008 at 2:01 pm
Brent
To Scott,
Not all of the mortgages in this mess are first leins which would suggest that some of these things are worth nothing. The complicated repackaging, "securitization," caused bankers to lose track of what actually went where and how much(the genius idea of spreading risk using mathematicians and physicists). The uncertainty in the marketplace coupled with increasing defaults(some of which are second mortgages and paid nothing) makes pricing impossible and therefore justifies such a low price.
To Larry,
The govenment bailout as is currently stands MAY be unfair to the American public...it's 350 pages long, I haven't had time to read it yet. But liquidity is dry and this package alone is the only thing that will get people to start lending to each other(Increase the velocity of money). As any economist will tell you increasing the velocity benefits everyone in a society, especially those that are borrowing money(make loans affordable).
October 1, 2008 at 1:57 pm
JOE
WHATEVER HAPPENED TO GOOD ACCOUNTING PRACTICES. AS AN INVESTOR, I WANT THE BALANCE SHEET TO REFLECT ACCURATE INFORMATION. IF IT IS ONLY WORTH $.22 ON THE DOLLAR THEN THAT IS WHAT SHOULD BE ON THE BALANCE SHEET. WHERE DOES THE AICPA STAND ON THE ISSUE.
October 1, 2008 at 1:52 pm
Angus
Great article! I completely agree that this subsection leaves a loophole that is contradictory to the intention of Section 101.e (Preventing Unjust Enrichment).
Valuation of these 'toxic' assets appears to be the pivotal issue in this entire plan. JPM got WaMu at a huge discount because that is how the free market works. However, the Fed is not going to 'bid' on securities, they are going to rely on the institution to value them and then simply pay that amount.
You wouldn't pay a premium for an imitation watercolor at a garage sale just because the owner claimed it was an original.
After combining mortgages into bonds and then slicing and dicing them, what is the real value and how can it be proven? How can the Fed suggest that there is little risk in this plan and more likely, gains to be realized? How can the agencies, companies and officials that allowed this situation to occur in the first place be put back into the middle of the 'solution'? Doesn't it seem 'backward' that Congress and the Administration is in a hurry to solve this problem and the American public wants to slow it down?
We, the American public (aka "Please don't call us Mainstreet"), understand more than we're given credit for. We know there are problems and where they came from. We just want to make sure there is enough time allowed for the 'sausage' to be made.
October 1, 2008 at 1:45 pm
JT
I am tired of hearing how everyone thinks this is going to open up the credit markets. Th banks are not just going to all of a sudden start lending to people that they would not have a week ago. Underwriting is back to the basics. You need the capacity, the character and the credit to be approved for loans. A lot of people don't have the capacity right now because of the run up on credit cards. A lot of people are lacking character because they are letting go of there houses. A lot of people are lacking the credit because they let go of there houses and ran up there credits cards. Do you think the banks are going to lend again because i the bailout? NO!!
In addition the $250,000 FDIC insurance also does nothing. Most people that closed there accounts at Washington Mutual and other failing institutions did so not because they thought there deposits were not insured but did it because they did not want to deal with a closing or merging bank. Everyone saw the lines that formed outside Indymac and everyone does not have the time or patience to deal with that. I myself have less than 100k and I would be at my banks front door if I thought they were in any trouble.
Lets stop kidding ourselves!!!
October 1, 2008 at 1:43 pm
John
Well written article - takes away the mystique of the AICPA version. Thanks
October 1, 2008 at 1:39 pm
Kelly Lawrence
and further more they should be waived of captal gains and windfall profit taxes. When the asset is catergorized and a Total Value Price is allocated to each TARP asset it should be sold through a national housing lottery to average citizen's with the same tax waiver. This is a win win situation that empowers taxpayers to pay the debt and remove the burden of this generations debt from the next generation.
Grace be with you all....
October 1, 2008 at 1:39 pm
chuck
while the taxpayers hurt,who benefits from the loopholes?
October 1, 2008 at 1:36 pm
Will
I am disappointed that Government, Administration,and Wall Street have continued to adopt an "us vs. them" mentality and dialogue to deal with and talk to America. Where is the "we are all in this together" rhetoric? It seems that we have a standoff "crabs in a bucket" mindset and neither side is going to do whats best for the country until they get what they want. Who is at fault doesn't matter. Are all parties willing to go under just to prove a point?
October 1, 2008 at 1:35 pm
Rachelle
I think its interesting that Congress tells us we may make money off of this. The problem is, they mean the Government makes money. We won't see any of our money back. We will only continue to pay more each year to cover this. This is not the right choice. No Bail out.
October 1, 2008 at 1:30 pm
Larry Parker
The crisis as had been repeatedly told in the media is believed to have been caused by a slump in the US housing market, with untold numbers of so-called sub-prime borrowers defaulting against home loans. So am I to believe that the foreclosures caused the evaporation of the values of the properties that collateralized those loans? Not likely. In fact those properties still exist and hold a great deal of value. The problem is that of a lack of cash flow. Mortgages are not being paid and that problem has the investors crying for relief. Where does the risk lay when some poor bastard picks up the phone and calls Uncle Sam to cover their bets? I do not remember seeing in any financial prospectus that the Federal Reserve will back up your losses on your investment(s).
Some will argue that the alternative is that of a second great depression. Well maybe that is a distinct possibility but I for one feel that we as a nation are smart enough to figure out what we need to do to prevent our nation from crumbling to dust just for the privilege of having a line of credit. The credit industry is the single greatest benefactor for that bailout. You and I are just getting set up for a major shearing by those very corporations that are just sitting back and waiting for our congress to pass a bill to bail them out of their mess. Even though they had been bleeding the nation with usury level interest rates and unjustifiably high fees applied to the credit balances of millions of Americans for decades we are asked to give more of our hard earned dollars to those thieves. This is symptomatic of a far greater problem.
October 1, 2008 at 1:29 pm
Scott
I couldn't disagree more. The point of adjusting the mark to market accounting rule won't hurt the taxpayers, it has a chance of saving us from writing a $700b check. This is another option that needs to be considered before the check is written amid screams from the American people that they do not want to bail out companies who made poor financial decisions. First, Merrill sold off their assets for $.22 on the dollar. That's almost an 80% discount, do you really think the houses that were backing those bonds lost 80% of their value? Of course not, that's absurd. Take any of those houses and discount them 25-30% off of their value and they will sell quickly. So, why should the banks have to go out of business when the assets backing their bonds still have some value, certainly more than $.22 on the dollar. The difference is that at $.22 on the dollar they are going out of business, but at $.75 on the dollar they can stay afloat until the market turns back around. They will take losses, as well they should for having made poor decisions. At least this way, we Americans won't have to pony up our checkbooks and write checks for banks who have shown they can't handle money. Even if this doesn't work, at least it's another option to consider before going another trillion dollars in debt. So, don't get rid of the mark to market accounting rule, simply put a temporary suspension on it in the sub-prime mortgage market so the banks can value the bonds at the true value (the home's value), then let them ride out these tough times until the market corrects itself.
Subscribe to Comments
Janet Kuntz
I lost tens of thousands of dollars in my 401K and personal accounts due to this crisis. I happily participate in this bailout through my taxes if it means I can recover some of those losses. A no vote would not punish the CEOs of those banks as much I would wish it to them. They have secured their money in offshore accounts. It will directly hurt the little people. As for me, it is not just the banks. Whoever bought cars and houses on credit, without being able to repay should also not be bailed out. Brainless people have houses that now have to be payed through taxes from those who act responsibly. There is no constitutional right to max out your credit cards and then be helped when destiny bites back.
nunzw
When I was planning for retirement, I made sure my car was paid off, and my one credit card was paid off. Although I worked all my life I never worked for a company that had a retirement plan, or 401K until 8 yrs before I retired. There was not much money in that 401K, and I used it to make repairs on my home. After 6 months of retirement I had to go back to work, SS is not enough, especially since the rise in oil prices spiked my heating and electric bill, and I still had a mortgage to pay. I have been a widow for 18 years and there were times I worked 3 jobs so I could make my mortgage payment on time. DO THESE POLITICIANS THINK I WANT TO BAIL ANYONE OUT??? NOT!!!!Let the chips fall where they may, America will survive, we always have, and just maybe we will be stronger for it. To all the Dems from MA no vote from me, you all need to move on and out of politics since you don't listen to the "folks" anyway. That "bailout bill" is still going to pay big bonus's and golden parachutes for the exec's that caused some of the problem.
Bruce
"Mark-to-Market" once elected by a firm must be used, you can't without IRS change jump back to Averaging or other methods. I got the impression from this article that the companies could pick and choose, I don't believe that's correct. Also, on the uptick, "Mark-to-Market" accounting inflates the corp. book value without any real (earned ro realized) change in the actual asset. This is one of the methods exec's can use to cook the books and qualify for large bonuses.
Sam
I emailed the last two sections of the article to my Senators and urged them to not support the proposed Senate bill.
Jed Clamped
This would benefit MAINLY children who at later ages would be able to tap that fund OR let it build VERY well over their lifetime. it'e not ESOPs it's CSOPS - Citizens Stock Option Plan All hail Kelso !
yo mammie
enough with "blaming the homebuyer"! borrowers had mortgage insurance tacked on to their house payment, they had to pay the premiums every month. the bank "handled" the insurance. that's where the problem is. the homebuyer bought and paid his insurance against default, but wall street didn't. they shell-gamed it instead. now the jig is up. so it's nothing but a massive insurance fraud perpetrated by wall street. end of story.
Jed Clamped
by SSN account, I mean give everyone an account at Goldman keyed on SSN
Jed Clamped
I see LIBOR triples as these ARM's reset... augh! Poor folks... Just days before today - people resetting MIGHT have been saying: "Ok, we CAN do this, mortgage is $2345" but with LIBOR at 3x ? the reset I take it then becomes ? Well, just DAYS ago, that reset probably would have been on top of about 3% LIBOR now ? it's up nearly 5% riding on about 8. For a decent slide ? chuck in another 5 ? That's 13% now instead of 8% reset. ALMOST double. if you're reset expected when LIBOR was down last week was to be $2500 a month ? Try more like $4250 now ! Heh- housing is going to dump which will furth push prices down. I say take all the federally funded corporate ventures as of late, and literally turn over the profits - ALL the profits to the taxpayers - dump it into a SSN account. Let Goldman manage them. Everyone wins. Faith, confidence is restored. Who'd want to doubt their nation states corporate assets if they own them ? Grandma and Grandpa don't become $ feedbags to the next generation. No one pays into SSN anymore. that money goes right into the economy. Makes sense to me.
Scott Kirkwood
They can't have it both ways. When housing prices were going through the roof the companies holding these bonds were taking the gains by marking them to market, now that they have went south they want to change the rules.
Patrick
Suspend mark to market for a couple weeks and see what happens. I agree with Scott. We may be able to avoid writing a check at all. I have more confidence in the "greedy" Wall Street folks getting themselves out of this rather than congress. What smart financial moves has the Government ever made? I see only trouble coming and a more powerful government if ANY form of bailout is approved.
Brent
To Scott, Not all of the mortgages in this mess are first leins which would suggest that some of these things are worth nothing. The complicated repackaging, "securitization," caused bankers to lose track of what actually went where and how much(the genius idea of spreading risk using mathematicians and physicists). The uncertainty in the marketplace coupled with increasing defaults(some of which are second mortgages and paid nothing) makes pricing impossible and therefore justifies such a low price. To Larry, The govenment bailout as is currently stands MAY be unfair to the American public...it's 350 pages long, I haven't had time to read it yet. But liquidity is dry and this package alone is the only thing that will get people to start lending to each other(Increase the velocity of money). As any economist will tell you increasing the velocity benefits everyone in a society, especially those that are borrowing money(make loans affordable).
JOE
WHATEVER HAPPENED TO GOOD ACCOUNTING PRACTICES. AS AN INVESTOR, I WANT THE BALANCE SHEET TO REFLECT ACCURATE INFORMATION. IF IT IS ONLY WORTH $.22 ON THE DOLLAR THEN THAT IS WHAT SHOULD BE ON THE BALANCE SHEET. WHERE DOES THE AICPA STAND ON THE ISSUE.
Angus
Great article! I completely agree that this subsection leaves a loophole that is contradictory to the intention of Section 101.e (Preventing Unjust Enrichment). Valuation of these 'toxic' assets appears to be the pivotal issue in this entire plan. JPM got WaMu at a huge discount because that is how the free market works. However, the Fed is not going to 'bid' on securities, they are going to rely on the institution to value them and then simply pay that amount. You wouldn't pay a premium for an imitation watercolor at a garage sale just because the owner claimed it was an original. After combining mortgages into bonds and then slicing and dicing them, what is the real value and how can it be proven? How can the Fed suggest that there is little risk in this plan and more likely, gains to be realized? How can the agencies, companies and officials that allowed this situation to occur in the first place be put back into the middle of the 'solution'? Doesn't it seem 'backward' that Congress and the Administration is in a hurry to solve this problem and the American public wants to slow it down? We, the American public (aka "Please don't call us Mainstreet"), understand more than we're given credit for. We know there are problems and where they came from. We just want to make sure there is enough time allowed for the 'sausage' to be made.
JT
I am tired of hearing how everyone thinks this is going to open up the credit markets. Th banks are not just going to all of a sudden start lending to people that they would not have a week ago. Underwriting is back to the basics. You need the capacity, the character and the credit to be approved for loans. A lot of people don't have the capacity right now because of the run up on credit cards. A lot of people are lacking character because they are letting go of there houses. A lot of people are lacking the credit because they let go of there houses and ran up there credits cards. Do you think the banks are going to lend again because i the bailout? NO!! In addition the $250,000 FDIC insurance also does nothing. Most people that closed there accounts at Washington Mutual and other failing institutions did so not because they thought there deposits were not insured but did it because they did not want to deal with a closing or merging bank. Everyone saw the lines that formed outside Indymac and everyone does not have the time or patience to deal with that. I myself have less than 100k and I would be at my banks front door if I thought they were in any trouble. Lets stop kidding ourselves!!!
John
Well written article - takes away the mystique of the AICPA version. Thanks
Kelly Lawrence
and further more they should be waived of captal gains and windfall profit taxes. When the asset is catergorized and a Total Value Price is allocated to each TARP asset it should be sold through a national housing lottery to average citizen's with the same tax waiver. This is a win win situation that empowers taxpayers to pay the debt and remove the burden of this generations debt from the next generation. Grace be with you all....
chuck
while the taxpayers hurt,who benefits from the loopholes?
Will
I am disappointed that Government, Administration,and Wall Street have continued to adopt an "us vs. them" mentality and dialogue to deal with and talk to America. Where is the "we are all in this together" rhetoric? It seems that we have a standoff "crabs in a bucket" mindset and neither side is going to do whats best for the country until they get what they want. Who is at fault doesn't matter. Are all parties willing to go under just to prove a point?
Rachelle
I think its interesting that Congress tells us we may make money off of this. The problem is, they mean the Government makes money. We won't see any of our money back. We will only continue to pay more each year to cover this. This is not the right choice. No Bail out.
Larry Parker
The crisis as had been repeatedly told in the media is believed to have been caused by a slump in the US housing market, with untold numbers of so-called sub-prime borrowers defaulting against home loans. So am I to believe that the foreclosures caused the evaporation of the values of the properties that collateralized those loans? Not likely. In fact those properties still exist and hold a great deal of value. The problem is that of a lack of cash flow. Mortgages are not being paid and that problem has the investors crying for relief. Where does the risk lay when some poor bastard picks up the phone and calls Uncle Sam to cover their bets? I do not remember seeing in any financial prospectus that the Federal Reserve will back up your losses on your investment(s). Some will argue that the alternative is that of a second great depression. Well maybe that is a distinct possibility but I for one feel that we as a nation are smart enough to figure out what we need to do to prevent our nation from crumbling to dust just for the privilege of having a line of credit. The credit industry is the single greatest benefactor for that bailout. You and I are just getting set up for a major shearing by those very corporations that are just sitting back and waiting for our congress to pass a bill to bail them out of their mess. Even though they had been bleeding the nation with usury level interest rates and unjustifiably high fees applied to the credit balances of millions of Americans for decades we are asked to give more of our hard earned dollars to those thieves. This is symptomatic of a far greater problem.
Scott
I couldn't disagree more. The point of adjusting the mark to market accounting rule won't hurt the taxpayers, it has a chance of saving us from writing a $700b check. This is another option that needs to be considered before the check is written amid screams from the American people that they do not want to bail out companies who made poor financial decisions. First, Merrill sold off their assets for $.22 on the dollar. That's almost an 80% discount, do you really think the houses that were backing those bonds lost 80% of their value? Of course not, that's absurd. Take any of those houses and discount them 25-30% off of their value and they will sell quickly. So, why should the banks have to go out of business when the assets backing their bonds still have some value, certainly more than $.22 on the dollar. The difference is that at $.22 on the dollar they are going out of business, but at $.75 on the dollar they can stay afloat until the market turns back around. They will take losses, as well they should for having made poor decisions. At least this way, we Americans won't have to pony up our checkbooks and write checks for banks who have shown they can't handle money. Even if this doesn't work, at least it's another option to consider before going another trillion dollars in debt. So, don't get rid of the mark to market accounting rule, simply put a temporary suspension on it in the sub-prime mortgage market so the banks can value the bonds at the true value (the home's value), then let them ride out these tough times until the market corrects itself.