I THINK WE’RE GOING TO NEED THE HELP OF MATTHEW, LUKE, AND JOHN, TOO

3/23/09

As many observers have pointed out, one of the problems with the incipient multi-pronged program to take bad assets off the books of banks and other financial institutions by forming a series of public-private partnerships and/or providing federal non-recourse loans for private players to buy distressed mortgages is the that of the marks that will result from such an endeavor if these contraptions actually work.

Several observers have pointed out that banks that have aggressively marked down their malodorous assets, such as Morgan Stanley and Goldman Sachs, may benefit if actual market prices are established by these Barack Goldberg contraptions; they could sell their bad assets at a book profit. But other institutions, primarily deposit taking institutions, have not been aggressive in marking down their fetid financings. Should they sell these stinkers into the new program, the experts point out, they will have to take a loss.

However, I have heard no one address a larger problem. Even if the banks that are carrying their assets at generous, or perhaps gullible, prices do not sell their bad assets, “mark to market” accounting will force the banks to mark those assets down to the new, lower prices established by the working of the Barack Goldberg financial mechanisms being cooked up in Washington. This should further impair their capital and thus might lead to the necessity of more federal aid.

“Mark to market,” as currently practiced, is, of course, a fraud. Since there is no market in these assets, a true mark to market, if we define market price as the highest price a willing, ready, and able buyer will pay, would be zero on many of these assets. These assets are not carried at zero, but, rather, some value based on discounted cash flows, “intrinsic” value, etc. One does not have to be too much of a cynic to contend that many of the assumptions behind the “market” marks are optimistic. So when a true “market” price, or at least as true a “market” price that can be gleaned from a bid that his heavily financed with taxpayer cash, is established, these assets, which currently do not reflect anything like market prices (zero, currently) will have to be marked down.

This latest attempt to have the taxpayers wipe the sniveling noses of the free market tough guys on Wall Street will thus do more harm than good unless “mark to market” is abandoned. So it looks like this whole program is either another in a series of not very well thought out plans from the Bush/Obama braintrust that is destined for failure and well deserved ridicule or simply a Machiavellian attempt to ditch “mark to market,” such as it is, and return to the halcyon days of not very long ago when we could simply ignore our problems and just pretend everything is wonderful; i.e., carry these bad assets at cost.