Your naive faith in this idea that a “market price” at any given point in time necessarily is the only or even the best measure of the value of an asset, without even considering the structural characteristics of the market in question, reminds me of those people who used to believe in a perfect, instantaneous efficent market hypothesis.
I’m a staunch critic of the EMH, and that I’ve said that the market for this paper is broken as well.
I think the idea of the “hold to maturity value” is yet more economist BS posing as hard science when in fact it is just gibberish decorated with mathematics. A large part of the reason why we’re in this mess is that a whole bunch of over-educated, but not terribly real-world people, used a whole lot of advanced mathematics to create instruments whereby they thought (due to monte carlo simulations) they could dispose of risk.
What is pretty quickly apparent when one reads papers on quantitative finance is that they completely disregard the fact that financial market events do not follow a Gaussian distribution. What is pretty apparent to anyone with experience in markets is that the EMH is a complete crock at the irrational margins. So you get what we have here: an event in the tails well out past two sigmas, simply overwhelming all the expected gains of the +/1 1 sigma world in which they’d like to think we live.
The market for compromised debt is clearly broken. I have no doubt that the market is under-pricing the asset(s) in question. I also have no doubt that Bernanke is going to over-pay for these assets, because, as he testified in front of Congress, paying “too little” for the assets won’t “sufficiently re-capitalize” the banks in question.
This idea of trying to re-cap a bank by buying their crap paper is just silly. Either the bank gets screwed and the taxpayers win big, or the taxpayers get screwed and the bank wins big in the valuation debate. The Treasury proposed a reverse auction process, which is also silly, because if there’s one thing that the California power crisis showed us, it is that reverse auctions can be easily gamed.
I want to remove all valuation debate completely. If the banks need capital, then we should provide it on the same sort of terms that Buffett provided capital to Goldman: get senior prefereds, paying a punitive rate (per Bagehot’s dictum for lenders of last resort: “Lend freely, at high rates”), and make it a fixed rate, not a spread above a benchmark, since the benchmarks aren’t working either. Just get the broken market(s) out of the way and be done with it.
Oh, and I’d tell all the people whinging about “this is socialism” to calm themselves and think long-term, because the longer this goes on, the more seats the DNC takes in Congress and if they get the presidency with a 60-seat majority in the Senate, Katie bar the door: we’re going to see a LOT more socialism than just infusions of capital into banks.