Posted on 09/24/2008 5:54:27 AM PDT by Keyes2000mt
Remember Enron, WorldCom, Adelphia, and other companies had artificially put assets on the books? They'd say something was worth $10M when they bought it, but eventually it decreased in value, and they never updated the value in the books. That was part of the fraud. Under current laws at that time, they were all convicted and put in jail for fraud.
Then we got all mad and made all these new laws that are coming out the wazoo called Sarbanes- Oxley. It's a huge, massive law but the idea is that we were going to mandate ethics to corporate America because apparently they didn't have any, according to the Enron failure. It's now a total pain in the butt to execute it in a publicly traded company.
It didn't work because you can't cause ethics to happen. However, it does make each company each day restate what their assets are worth if sold on the market. This accounting procedure is mark to market accounting--you need to remember that. It's a good concept and keeps companies from having loaded balance sheets.
However, it's part of what's caused this in the news now. Merrill Lynch was sitting with $30 billion are tied up in sub-prime loans with houses. Stupid! They get what they deserve for doing that, and I'm with you on that. Those houses didn't become worthless all of a sudden because those people couldn't sell their bonds. Since they couldn't sell them, they basically gave them away for 22 cents on the dollar. Now do you think all those houses lost 80% of their value underneath that deal? No, they didn't, so they gave them away for 22 cents on the dollar (about $6 billion total) because there was no market for them. Nobody wants to buy sub-prime bonds because they suck. They're junk bonds. But at 22 cents on the dollar, it's a bargain because even if you foreclosed on every one of the houses in there, you'd probably get $20 billion back out of $30 billion, and so the company that bought those for $6 billion got a deal! But there's no market for them. That's where these companies are stuck. They can't sell this stuff, but accounting-wise, they've had to mark it down to market and it's frozen the marketplace.
Economist Wesberry is saying that if we change that one rule and don't force them to market down to market and just let them hold on to all the stuff, and say just on sub-primes for this period of time you can change that rule -- a temporary change -- that'll free the market up. It's seized right now; it's frozen. This will thaw it out and get it going again. He says that'll solve 60% of the problem ... and I think he's right.
That one accounting rule is what made Merrill Lynch sell out. That one accounting rule is what's driving other ones into the dirt. Would you rather let them change their accounting rule or loan them $700 billion for us to buyout their bad paper?
I'd rather them work their own crap out than change the accounting rule.
I don't like giving them any money or any help with my tax dollars. But I'd rather see that than see the whole thing turn completely upside down in a fruit basket turnover rather than have a whole meltdown or something and freak out here in the middle of the election season. Why don't we just take the FHA insurance program and extend it across these sub-primes? What that means is that you and I are guaranteeing the lender that they're not going to lose as much or any money on those mortgages. Now I don't like guaranteeing them, but I like it better than buying them. In other words, instead of $700 billion in tax-payer debt going out there to bail out these companies, just extend the insurance out. You could probably do that for less than $40 billion. It's like a 95% savings!
If the government insured those mortgages, they would then be marketable. And could sell them. And the companies would stay afloat. And we, the people, don't have to get into the mortgage business. Now we're going to get in there a little bit because of the insurance on those getting foreclosed on. But foreclosures aren't causing this. This is being caused because these companies are frozen and seized up. We've got to let some of the steam come off and put some oil in there to get this thing moving again. We can do that without going into debt $700 billion.
Call your Congressman. Call your Senator. Tell them to change the mark-to-market accounting law and to extend insurance but extend no loans. If they extend loans - if they borrow the money on the national debt in order for us to all go into the mortgage business a trillion dollars - you're going to fire their butts and send them home.
I've talked with several people today, and it's on the tables in Washington, but it's not something you're going to see on TV. If you'll let your Congressmen know you know about this and that you'll vote against them if they don't vote to change the mark-to-market law and you'll contribute your money to make sure they never serve in office again. That's what you need to tell them early and often.
Throw the B@stards out Nov.4th........
Garde la Foi, mes amis! Nous nous sommes les sauveurs de la République! Maintenant et Toujours!
(Keep the Faith, my friends! We are the saviors of the Republic! Now and Forever!)
LonePalm, le Républicain du verre cassé (The Broken Glass Republican)
Good stuff. We need more voices of reason before Congress enacts some knee jerk, socialist/populist plan that has the net effect of shackling our free market economy.
Go for the Gingrich plan!
Sounds good to me!
Of course I know little about economics, and rarely comment on it here. I typically just read what others have to say with hopes of learning.
Bull. The problem is just the opposite.
The stuff IS NOT MARKED TO MARKET, and that's the problem. If it was marked to marked, we'd know right now that every single financial institution is insolvent. Not illiquid, but insolvent. Period.
Has this guy never heard of level 2 and especially level 3 assets ? How about the "goodwill" line on companies books on the asset side of their balance sheet ? Goodwill can now be calculated and used as part of the banks' Tier 1 capital ratio ??????
If they WERE forced to mark assets to market and come clean on everything they claim as assets, the credit market would unfreeze and we could move forward.
Yes, every single financial entity would probably be bankrupt, but OK - let's let the FDIC handle it, capitalize the FDIC, and move forward.
Allowing the banks to continue playing "hide the sausage" in their books will continue this crisis.
Sent e-mail telling them to NOT pass the bailout.
Why don’t the “great financial minds” running these brokerage houses-of-ill-repute come up with a way out instead of capitulating to the mess?
Congress-critters have their own money tied up in these brokerages...
Did that yesterday. Considering calling them. Problem is, it’s Pelosi and Reid’s congress right now. Do you think those two tools will listen to reason?
Washington is the problem.
There will always be some people in business and other walks of life ready to abuse the system - who will always go past reasonable limits to satisy their greed for money and power.
But, instead of common sense regulations to control that greed, Congress has channelled and used greed to push their political agenda.
They set up a system to reward greedy people for abandoning sound business practices and to carry out the underhanded racist policies congress put in place to socialize home buying and consumer credit.
If it didn't work, then we could talk about helping lenders in some other, more painful fashion.
It would at least give us time to observe how big this problem is we're facing instead of the chicken littles in the media saying the sky is falling so that they can get their stories read and setting up their corrupt Dem politicians as saviors when in reality they're just going to use the chaos to steal taxpayer money.
Ramsey has it exactly right. The sub-prime solution does NOT require a bailout. In fact, the proposed bailout does NOTHING to address to root cause of the capital markets freezing up.
Congress needs to:
1) Suspend mark-to-market rule on all mortgage-backed securities to restore those securities to actual value.
2) Extend federal mortgage insurance to all existing mortgages to eliminate fear of sub-prime default and restore buyer confidence in mortgage-backed securities.
What this solution means:
- The worst-case taxpayer cost for insurance payouts on sub-prime defaults is a tiny fraction of the proposed bailout.
- It fixes the root cause of the problem. (the proposed bailout will NOT)
- The housing market will likely rebound quickly.
- No complicated dealings with security buybacks, executive pay, and a thousand other details that do nothing to fix the real problem.
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