The Geithner Plan

http://corner.nationalreview.com/ ^ | 3/23/09 | David Freddoso

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Be careful to distinguish between "REO", real estate owned by the banks through foreclosure, and mortgage assets they hold in the form of mortgage loans or securities representing pools of mortgages.

In the case of REO, banks are not built to hold homes long-term, they are looking to re-sell them and thus the book value needs to reflect the current market value. However, REO is a very small piece of banks' balance sheets, as banks will sell them off quickly, even at big losses.

In the case of mortgage loans or securities, why mark to market? Banks are not built to hold on to loans for 15 to 30 years, they fund themselves via short-term deposits or time deposits or borrowing of maybe up to 7 years, 10 years tops. They can pay off their deposits or debts when due by selling off the assets, or re-financing and getting new or renewed deposits. When that is in doubt, there is no assurance they can pay off the creditors.

That is where government steps in, by assuring depositors and creditors. Having done this, it does make sense to free banks from mark to market, which is reducing their capital and thus lending capacity, and allow banks to value mortgage loans and securites based on their repayment performance. The question is, what interest rate do you use to calculate the value of that future repayment stream? Again, the government sets the mark, which it will do by lending $6 dollars for every $1 of equity to buy distressed assets.