Posted on 09/30/2008 5:32:05 AM PDT by politicalmerc
First,
"Not so, bank solvency relies on the "paper" or theoretical value of their real estate holdings AND the value of depositor's cash deposits that are real.
This statement is wrong in a number of ways. First, the bank has no real estate holdings other than REO's which they don't want. According to the FASB they must value their CMO holdings by "marking the market" each day. This assigns a REAL value to their paper. The underlying collateral is not theirs and is not directly considered in this valuation. That is one of the problems.
Your second misstatement is more fundamental. It sounds correct to say that the "value of their deposits is an asset" but to a bank the deposit is not an asset, it is a liability and they only keep a very small percentage of the cash.
Banks operate according to rules promulgated by the Fed and the FDIC. I don't know why you think they are insolvent in theory only, but that statement is so off base I can't even begin to explain. Banks operate off of a "planned insolvency" that is crazy but true, it's call the "fractional reserve system." You can look it up but basically they are only required to keep a small amount of reserve per deposited dollar.
You are almost right when you say banks are unable to borrow money to lend out but your concept is wrong. We are not really worried about the bank's income. Banks can only lend out their excess liquid reserves. The big problem right now is that no one will buy their illiquid reserves and therefore they have little capital to lend. I don't care if they make money but the economy depends on that liquidity to survive.
I don't know if you will believe the truth I'm telling you, but it is none the less true. One of my favorite quotes is that "Truth is not in need of believers."
I don't know if this bill is the right one, but I am telling you that we absolutely MUST put liquidity in the markets or the system will fail and NO ONE will be safe. If you are not holding GOLD or some physical asset in your possession, you are not safe if this system fails.
Probably because the bigger the loan the bigger the profit, and they could pass off the default risk to somebody else.
Search my posts on this thread.
The meme has been issued. The media core are now puching this act of corporate welfare as a “rescue” plan.
The fear mongering is being deployed to control the citizens.
Of course if that doesn’t work there’s also the sympathetic pleas that beg us to let the “little guy” continue to use his equaity as an ATM machine to buy a car or plasma television.
So, why can there not be a temporary suspension of the mark to market rule?
They are considering changing the rule to a valuation of Maturity which would partially fix that problem. Then the problem is that valuation to maturity is very subjective. The US Government would be using valuation to maturity to determine the price they would pay for these assets.
You really need to read my other posts on this thread if you think this is some sort of fear mongering. This is a real crisis and pretty soon there may not be any money in your bank at all.
The coming foreclosure market will be a gold mine for liquid investors.
That is the nature of a free economy.
Our economic system to too complex and networked world-wide to be a house of cards. A wing may collapse, profit-takers will swoop in, value is preserved. The key is the productivity of the profit-takers. Private market productivity in reclaiming value will always be higher than that of government employees.
The highest productivity in the world is what allows America to dominate the world economy. This is a gut-check time to see if the free market can still solve our problems or if we are going into an era of nationalization.
The coming foreclosure market will be a gold mine for liquid investors.
That is the nature of a free economy.
Our economic system to too complex and networked world-wide to be a house of cards. A wing may collapse, profit-takers will swoop in, value is preserved. The key is the productivity of the profit-takers. Private market productivity in reclaiming value will always be higher than that of government employees.
The highest productivity in the world is what allows America to dominate the world economy. This is a gut-check time to see if the free market can still solve our problems or if we are going into an era of nationalization.
As if the current mark to market rule is not subjective. It's obvious to the casual observer the underlying securities have value far above what the accounting standard requires be reported. The accounting standard should be suspended, at least temporarily. No money changes hands, no taxpayer funded bailout/workout. Immediate liquidity. Problems?
Bumpy Bumpty to the Toppy
My friend I love it when someone uses the phrase, "it's obvious that...." because though it makes sense it is rarely obvious. While this redefining the definition of value would help it doesn't provide liquidity because no one is buying the bad debt and the terms of the mortgages can not be changed.
The government can buy the CMO's and because there is not a profit motive and we would own all the streams, we could rework the mortgages and save many of them. We could also put cash in the system where there is currently frozen assets. So redefining the value would partially fix one of the problems but only providing a lender or insurer of last resort will "unclog" the credit market.
Despite what many people say the world runs on credit and can not make the adjustment to "no credit" on a dime. Nor would you want them to make that adjustment because it isn't all it's cracked up to be for more reasons than I'm willing to go into.
I think ForGod’sSake asks an excellent question. If accounting rules are changed from “mark to market” to “valuation to maturity”, wouldn’t that go a long way in fixing this mess?
BINGO on many of your statements. But this “bailout” is not nationalization like what happened to Fannie and Freddie. I’m amazed that the government nationalized $5 TRILLION dollars in mortgage debt and no one said a word. But we want to provide a mere $700 billion in liquidity and everyone acts like it’s a bank robbery. Excuse me for saying so but the money has been gone for a long time. ;-)
Look at post 54 for that answer. Yes it would, but more has to be done.
No on HAS to buy the bad debt. It's not likely to go anywhere anyway. BUT, just re-marking the MBS's to, say, 50% of "at maturity" value would free up TRILLIONS of dollars of liquidity. A simple accounting entry. What is the worst that could happen if this accounting principle ALONE was implemented? All the while working on a more permanent solution -- which may in fact not be needed.
I'm not sure why you think this is true. re-marking the MBS to a collateral based value would shore up the assets of the bank and allow them to stay solvent. I think that part is an excellent idea.
However, it would create no liquidity at all. Liquidity can only be created if there is a market to sell the illiquid assets. The government is considering becoming the buyer of last resort to provide this liquidity. Because there is real collateral value in these MBS's the government, if they did it right (don't get me started), would actually MAKE money for the taxpayer in the long run.
There is a precedent: The Resolution Trust Corporation that worked out the S and L crisis made money. Remember the doom and gloom of that era?
Is there any way to change to rules on these securities that allows more flexibility in selling them off?
Several things that could make this work:
1. Make evictions easier for nonpayment of mortgages.
2. Somehow develop rules that allow a middleman to buy these securities and split them into geographic units. These units are then sold to local banks and investors who would then have some connection to local real estate markets. The idea would be to return to local control and use the local investments as the injection of liquidity back into the markets.
3. If local investors know they can gain control of the property in a reasonable time, it makes the investment worthwhile.
4. These geographic units could be split on a local level to be sold based on how bad a debt they are. Some would be sold at face value, others at 75, 50, 25 or 10 cents on the dollar. This would get the full value out of the good debt and get at least some return for the bad debt. The goal would be to find a way to have those losses eaten as early in the rebundling as possible.
I know there are probably all kinds of problems with this solution, but I am simply putting it out to illustrate principles of a solution.
-return investment to a local level
-allow investors to easily gain control of property in default
-find a way to parcel out the securities and eat the losses on the bad debt so that the remaining debt is fully valued
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