Posted on 04/07/2009 11:23:49 PM PDT by FromLori
Banks had been clamoring for a relief program that would allow them to unload risky subprime mortgage assets. On March 23, Treasury Secretary Timothy Geithner detailed a plan in which the government would provide cheap loans and guarantees to investors willing to buy the problem assets. Stocks rallied that day, sending the S&P 500 Index up 7.1%.
Now an accounting-rule change might prompt banks to ditch the plan and hold on to their troubled assets. The relaxed rule passed last week enables banks to assign higher values to assets, making it less appealing to sell them at a loss. The amended policy could worsen the subprime loan crisis that has roiled the global economy for the past year.
(Excerpt) Read more at thestreet.com ...
“Accounting Change May Hurt Geithner Plan”
Unintended consequences, or....
...the right hand doesn’t know what the left is doing?
Neither in my opinion the smelly one is paying back the banks and soros.
When in doubt, blame the accountants. As if how a dead fish is placed on the counter makes the kitchen smell better. Bad ideas and bad investments always end up looking bad too. This government has spent waaaaay too much time and energy using the internal revenue code and accounting rules to perform social engineering.
All this does is allow the banks to keep their valuable assets and set their values. The least valuable assets they will unload into the public/private partnership at the tax payer expense. Some percentage of these assets will go bad and since the loans are backed by the FDIC the taxpayer will have to foot the bill on that one also. These people just do not know when to stop with the scams.
If you have been paying your mortgage for 15 years, and have 15 left, and the neighbors on both sides of you just defaulted ... with mark-to-market your mortgage just lost a lot of value.
It's net present value of future cash flows to the bank, but because you are now in a “risky neighborhood”, they have to use a higher discount rate to figure what your mortgage is worth to them. Even though YOU are still paying, and YOU still have a job, and YOUR mortgage isn't subprime, and YOUR mortage is a traditional 30-year. Mark-to-market can be stupid in this situation, but they still have to use it. And then the bank's assets fall (on paper) and their balance sheet worsens (on paper), and they need a bailout (on paper), and nothing with you or your mortgage has changed, except your no-good neighbors defaulted. And Geithner fires your bank's CEO and the government steps in ... all based on paper accounting.
It seems to me that the mark to market rule almost guaranteed a death spiral would occur, at the first sign of market weakness. Mark to model may have been open to abuses — but, at least it wouldn’t create a runaway negative feedback loop.
You’re the expert — what do you think?
Bravo, finally someone who understands.
Thank you! That was a wonderful tutorial on the mortgage market.
“And Geithner fires your bank’s CEO and the government steps in ... all based on paper accounting.”
I’m not sure how this will help, so could you please expound?
Not that I’m worried about the bank’s CEO.
I just don’t know how that will help, except to give the impression of “change.”
Too, why do you think Geithner isn’t accepting the mega-banks’ offer to repay their portion of the bailout monies they’ve received?
What do you think about the credit default swaps, and their impact?
Frankly, I wish they had frozen them, and said, “Sorry...you lost.”
But, I’m not as well versed in these matters as you are.
These are serious questions...and I would appreciate your thoughts.
I hope I don’t come off as appearing to be too dumb. ;o)
Eventually we will have moved so far into an artificial economy that the only thing left to do will be to formalize it.
I understand what you’re saying, but we’ve been looking at foreclosed property and we’re using a handy little online source our realtor gave us access to. It not only lists the foreclosed property (and all MLS listings), but lists the downticks in the price, and also comparable area values of other homes that have recently sold.
The truth is, if the property on either side of you did go into foreclosure and sold at bargain basement prices, your property value took a hit too (at least that’s the way it looks to me after weeks of watching the prices in certain neighborhoods.) So isn’t this accounting tool (mark to market) easily manipulated by the banks in order to make them look stronger.
And doesn’t it ignore certain facts when they say, “Well this mortgage is being paid, so it’s not at depressed value,” when, in fact, I know several people who are really struggling to pay their upside down mortgages and those properties could face foreclosure in the future.
I’m no economists, but these are just some basic questions that have come to my mind as I’ve been looking at property values and hearing mark to market explained.
Thanks for any insight you can offer.
the gienthner plan will fail not because the banks fail to participate but due to lack of buyers. Banks would love to off load these because it reduces their 100% exposure to just 6% exposure with all the up side intact and all the loses goes to taxpapers
It is nice to someone who understands what the mark-to-market rules actually do to the values. That many of the assets had a “Fair Value” far less than the true cash flow value. Especially since these “adjustments” to value go straight through and reduced capital to levels unsustainable in the banking world. The loss of some of the banks based on low capital levels from purely paper losses is a shame.
Thank you Bill for an explanation that everyone should be able to understand!
Mark-to-market is a really valuable tool when you're trading things that change in value frequently, and get traded often, and have very liquid markets. It is a very good system to have around, just not for mortgages.
Mark to model is a better tool for mortgages. It is somewhat open to manipulation, but there are controls in the system ... auditors, bank regulators. They have to earn their keep somehow.
Firing the CEO helps no one but Obama and Geithner ... those strong "men of action".
Too, why do you think Geithner isn’t accepting the mega-banks’ offer to repay their portion of the bailout monies they’ve received?
It's clear he wants the option to control everything. It's also why they didn't like the accounting change away from mark-to market ... "Oh dear, this change will make it less likely that banks take loans from us to buy "toxic assets", and then we won't be able to tell them what to do.
What do you think about the credit default swaps, and their impact?
I think CDS are very useful and important in the debt markets. They are an insurance policy against defaults, if used correctly. I think anyone who was in a naked position deserved the consequences of their actions. It's the same in all options markets ... they are useful for insurance and as a hedge against volatility, but someone who takes a naked position takes on a lot of risk. I have no sympathy for people (or companies) who got burned by them. But I don't see any good in taking the tool away from companies who benefit by using it responsibly.
Your answers to my questions are very helpful.
Obviously, I’m no financial wizard. ;o)
However, I think we all need to learn more about what’s going on, and what the government is doing.
Thank you so much for taking the time to reply!
I truly appreciate it.
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