Posted on 03/01/2009 7:59:48 AM PST by SeekAndFind
The government is putting its printing press into overdrive. Congress passes new legislation every week that either bails out auto companies or bails out banks; the Federal Reserve has lowered its rates to zero and opened up the borrowing window; and the Federal Deposit Insurance Corporation (FDIC) has increased the amount of insurance it allows each bank account to be insured for.
In your own life, when confronted by a budget crunch, don’t you look for some free ways to alter your lifestyle to make things better? Our government can do the same. Here are two suggestions as to how the government can make the playing field fairer, and help alleviate the credit crisis without spending a penny.
First, they need to bring back the “uptick rule” to the stock market. The uptick rule was part of the Securities and Exchange Act of 1934. It allowed traders to sell a stock without owning it, but only after a slight rise in the price of the stock. The rule stopped raids from happening on stocks for 74 years. After being repealed on July 6, 2007, shorting could and still can be done without waiting for any upward movement in the price of the stock. Just sell the stock, hope the price action goes your way, and make money buying it back. Short sellers can be merciless. If there is enough selling pressure, a frenzied run on the stock can ensue. Investors are either forced to sell because of margin calls, or sell to save any profit they have left in the stock. If there is enough selling pressure, a run on the stock can start as investors sell to cover losses or take profits. It has been alleged that hedge funds colluded to attack different bank stocks.
Our nation’s stock exchanges are a public market where capital is raised for business. Of course, you can make money there speculating and investing. However, the primary role of this marketplace is for businesses to raise equity stakes to create cash for their balance sheets and continuing operations. By framing the role of the marketplace in this manner, having rules on speculative short selling provides proper regulatory control of the marketplace. Short selling would still be allowed, but the short seller would have to assume a little extra risk by selling into a higher price. Shorting stock does provide an invisible hand, as it keeps companies and investors honest. Call options writers would have special rules with regard to shorting stock. We have to limit the way short selling can occur because its misuse has brought detriment and dislocation to the marketplace. This change in regulation costs nothing.
Mark to market is a noble and correct (for the most part) idea. This accounting standard is destroying our banking industry. Toxic assets are continuously being marked down, eliminating the equity in our banks. Wherever there is a liquid market, or a closely comparable market, the bank ought to value assets at the market price. When there is no liquid or comparable market — as with many of these toxic assets — banks should not be forced to continuously write them down. In good times, they will be forced to continuously write them up, causing the bank to be overvalued. What we really want is an accurate valuation of the bank. Mark to market can distort the true value up or down.
How do we value the assets if there is no comparable market — no liquid market in which to value them? The first step would be to look at the cash flows from the asset and price them accordingly. At least this will provide some approximation of the future value of the asset. Accountants and financiers could argue over discount rates and timing of cash flows, but at least they would have some realistic numbers to look at. This would take a lot of pressure of banks’ balance sheets. Retooling the rules on this costs the government and the taxpayer nothing.
The third action government could take is to ban banks from paying dividends to any shareholders. Banks have severely reduced their dividends anyway. A government ban would give them cover from the marketplace. Companies that miss a dividend payment would be severely punished by the market. When banks are healthy again, the statute could be repealed. Again, no cost to taxpayers.
These three slight adjustments — bringing back the uptick rule, amending mark to market accounting standards, and prohibiting banks from paying dividends — will help the stock market and banking industry recover. This costs the government nothing, and is an efficient use of government.
Author’s credentials :
Jeffrey Carter is a former member of the Board of Directors of the Chicago Mercantile Exchange, and has been a “speculator” — independent trader — since 1988. He holds an MBA from the University of Chicago.
Ping...
Steve Forbes has been holering about this for months. Is the Government deaf?
Don’t change the mark-to-market accounting rule. That’s gimmicky.
A more fundamental improvement would be to make mortgage bonds tax free. Right now investors pay taxes on their interest, unlike investors of tax-free bonds.
Make the mortgage bonds tax-free and those bonds will instantly become worth more. Hmmm...isn’t that the deal-killer of the sub-prime mortgage meltdown?! That investors aren’t putting any value on the toxic mortgage bonds...
Anyway, by making mortgage bond interest pyaments tax-free, you lower interest rates to home-buyers.
This is a much cheaper way of stopping the free-fall of commercial real-estate, homes, condos, etc. This just costs the government lost interest income tax revenue, instead of costing Trillions to prop up banks who have to Mark-to-Market the falling bond prices that we are now experiencing (e.g. for sub-prime mortgage bonds).
Make mortgage bonds tax free just like municipal bonds.
This part is correct, you should only be allowed to sell that which you physically own. the part about allowing funny money valuation is BS.
Plus, there should be no credit transactions in the futures market, you buy it you own it and you take delivery, then sell it no more of this play business stuff.
Only in fantasy land. The deal killer of the mortgage market is an over supply.
He’s partly right about the toxic assets. They should be evaluated by cash flow and “quality”, but should also be allowed to be traded on the CBT or other exchanges..so that a true”market” value could be placed on them.
There may be some really great investments there..with great cash flows..who knows now?
“The third action government could take is to ban banks from paying dividends to any shareholders. Banks have severely reduced their dividends anyway. A government ban would give them cover from the marketplace. Companies that miss a dividend payment would be severely punished by the market. When banks are healthy again, the statute could be repealed. Again, no cost to taxpayers”
This would help the capital positions, of the banks, because they would no longer have to pay out dividends.
However, stock price, in the long run, is based partly on dividends and this would not help the price of the bank stocks -— but, wow, they have all tanked anyway.
Ban naked short-selling, aka “Fail to Delivers.”
Well, granted there is an oversupply of housing, but as long as people are making mortgage payments **at all** it’s pretty tough to have an oversupply of mortgage bonds.
The author of this article wants to fix the crisis by eliminating the mark-to-market rule...clearly not addressing an oversupply.
My response is that the mark-to-market rule would be less of a factor if the mortgage bonds weren’t falling in price to be needed to be marked down in the first place.
And to stop the free-fall of pre-existing mortgage bonds, one should simply make them tax-free.
That lowers transaction/carrying costs, a much preferable solution compared to the gimmicky action of just eliminating the mark to market accounting rule.
The value of a commercial or rental property is based on a “cap rate” or a cash flow determination.
It is entirely reasonable to value any property or any security by the income it produces.
Mark to Market was an over reaction to a previous problem with World Com and other companies. (Another time that Democrats ran companies that gave lots of cash to other Democrat politicians, and the public was never really informed about it.)
Naked short selling *is* banned. It’s completely illegal.
The SEC just won’t enforce it. You’ve got to tag every electronic stock share with a unique serial # to track/enforce naked short selling bans.
Privacy rights come into play when talking about individual debt.
You can look up any municipal credit rating or any corporate credit rating.
Not so with individual mortgages.
This makes it hard for even the market to place a value on these things.
Mark to market is just an accounting rule. If a bank is holding bonds that go down in market value, then the bank has to write down its own bonds according to what happened in the broader market.
It’s a paper change.
A more fundamental change would be to make mortgage bonds tax-free. That’s a real-world change instead of just an accounting gimmick.
Make mortgage bonds tax free and they’ll instantly be worth more because they are instantly delivering a higher return...which instantly lowers interest rates on new bonds (i.e. lower mortgage payments to new homebuyers).
And because you just made the bonds more valuable, the mark to market accounting rule suddenly starts working in your favor.
Instead of writing down their value, banks have to start writing them up.
I understand your point.
However, any mortgage backed security that could claim a portfolio that was, say, 5 years old, would probably have more market appeal that one that was just put together, agreed?
So, very few of these complicated mortgage backed securities deals are going through right now, anyway.
Many of the existing deals, as we all know now, are having huge problems.
So, TIME will fix this problem, because some of the deals will age, and they will be able to show a 3 yr, 5 yr, etc AGE from the origination date, on all of their mortgages.
THIS will give them some value!
No. They hear just fine. They have no interest in fixing this the proper way.
Time helps. You can speed up the process in the meantime by making mortgage bonds tax-free, however.
This is much more preferable than simply eliminating the mark-to-market account rule.
Investors would still hold the current environment against banks who hold mortgages, even with the mark-to-market rule gone...but in contrast, investors would **reward** banks if their mortgages suddenly went up in value (e.g. by making their mortgage bond interest tax-free).
“It’s a paper change.”
It is a paper change with DRASTIC results!
Does a landlord, in this economy, care about the price of his rentals, or the employment of his tenants so that they can pay their rent?
Mark to Market is a bad idea. I do not claim that modification of the rule would solve everything, but it would help.
Think of a hypothetical bank that has zero defaults in its lending pool. Now, Mark to Market forces that bank to value its book of mortgages, which MIGHT have a much higher quality that the market at large, at “Market” value, which has tanked. When the FDIC looks at the books, they do not care if the mortgages are being paid, they care about the “capitalization” and their capital is down due to the value of their mortgages being down!
Also, when the public hears about a bank with a declining capitalization rate it will cause a run on that bank, even if all of the mortgages are good, even if all of the mortgages are not in default.
This problem gets much worse, of course, in the real world, when the bank also has to deal with normal default and foreclosure issues that every bank will deal with.
The accounting change would make the books look better, but *investors* would still know that the assets were unchanged.
You’d have pretty accounting books, but morabund stocks. That’s what you’ll get if you just change the accounting rule.
Changing actual income and improving actual asset values by making them tax-free, however, will improve investor sentiment.
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