Tuesday, September 23, 2008

I don't believe this. Do you?

This is a really bad plan...I have a better one (below)
When Paulson was asked if they had other plans that he had rejected, he sort of mumbled yes. When asked by Sen Shelby to enumerate them and say why they were worse than teh one he chose, he rambled well off topic. (i.e there was no other plan considered.)

My preference is to put in abeyance the mark to market rules. Bernanke said he was opposed to that because it would undermine 'confidence in the system'.

The camera was not on Bernanke when he said this and I could not tell if he said it with a straight face or not. How could we undermine confidence in this system by anymore? Really Mr. Chairman... Bernanke also said that there are a lot securities for which there is no active market. For them mark to market has no meaning.

Bernanke said he was opposed to eliminating the mark to market rule because it would undermine 'confidence in the system'
The camera was not on Bernanke when he said this and I could not tell if he said it with a straight face or not.

My idea of getting rid of mark-to-market is to keep banks on the hook for their loans but take their SOLVENCY concerns off the hook while doing it. Mark to market will still be used as a shadow system since banks will be striving to fix themselves up so they go back on it and go back to an ordinary or stepped down program of regulatory oversight and stricture. That would be their ultimate goal.

A BETTER plan- how it would work
Banks would have to OPT into this system that put the rule on mark to market in abeyance. They would still have to track market to market values for all securities as before. Government overseers would get veto rights over dividend payouts and corporate officer compensation while banks were on this system.

Banks would not like it but they would no longer be in jeopardy of solvency. The approach would ELIMINATE COUNTER PARTY RISK. Instead of being bailed out and whole, they would be on probation and closely watched.

Banks on this program would be able to reserve against their security-holdings' value short fall from a true market to market value and do so at their own speed. This shadow system would dissuade banks from foreclosing on mortgages willy-nilly since to do that would be to destroy the value of underlying loans which would force the bank itself to deal with that shortfall. Banks would, therefore, get a built-in incentive to work with homeowners.

This program puts time on the banks' side. Given time, these various assets will come back in value. The process of banks planning to reserve more for value shortfalls and the fact that housing assets will rise in value as the economy improves will eventually allow banks to heal themselves. At that point they can opt out of the system that lets them stop marking to market their securities knowing that it has now sufficient reserves to cover any shortfall and that asset prices had come back to a large extent.

Banks can choose their own speed for doing this. It creates a built in incentive to help homeowners.

As a plan this is MUCH BETTER than the Treasury plan.

It would cost the tax payer NOTHING.

It would protect the banking system

It would provide some benefit to struggling homeowners. .

It would subject banks to more intensive oversight and regulation until they had dealt with their problem

It would ELIMINATE the current plan's problem with moral hazard and what a problem that is! No one is reminding you of this, but if you bail out the banks like this this time there will be another time and next time it will be worse.


1 comment:


Sometimes its hard to believe.