How We Can Clean Up A Lot of the Economic Problems

Dave Ramsey Website ^ | 09/24/08 | Dave Ramsey

[mn-bush-man]

How We Can Clean Up A Lot of the Economic Problems

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.

How This Affects Us Today

However, it's part of what's caused this in the news now. Merrill Lynch was sitting with $30 billion 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 Wesbury is saying that if we change that one rule and don't force them to mark down to market value 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 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.

Here's Your Plan

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.

If you're pissed, this is the time to step up and do something about it, America! You can stop this! It's being railroaded down your throat, but you can stop them if you call them in mass starting now. READY ... SET ... GO!

Contact:

[mn-bush-man]

Sorry if this has been posted -- search function isn't working very well! This looks very interesting.

[whitedog57]

Easy. GET CONGRESSIONAL DEMOCRATS TO STAY OUT OF THE FREE MARKET AND STOP SCREWING IT UP!!!!!!!!!!!

[whitedog57]

Easy. GET CONGRESSIONAL DEMOCRATS TO STAY OUT OF THE FREE MARKET AND STOP SCREWING IT UP!!!!!!!!!!!

[ari-freedom]

obviously I’m not an accounting expert but I’m surprised...one rule is going to make such a difference?

[org.whodat]

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 I call them it will be to tell them to increase over-site, nothing like the sunshine to clean dirty undies.

[mn-bush-man]

obviously I’m not an accounting expert but I’m surprised...one rule is going to make such a difference?

Nor am I an accounting expert -- I was hoping a Freeper or two who are might stop in and comment on this proposed rule change... if it could save us spending $655 BILLION dollars, it certainly warrants looking into!

[sd-joe]

This sounds right.

[arthurus]

Clinton and Carter already screwed it up. Now the Republicans and Democrats all are trying to feed the rest of the economy into the black hole they have created.

[gidget7]

NO! Increase nothing! There already is oversight. No more growing of government! Trow the bums in the oversight committee out! Fire them, put new people in there that will do their jobs! Growing more govt. or another oversight committee, is having oversight on the oversight committee. NO!

[ConservativeMind]

Sarbanes is a great tool to assure companies do not do fraudulent things.

However, if this is all that is needed, LET’S CHANGE IT NOW!

[org.whodat]

Years ago I was in one of those large rooms with a whole bunch of other nerds, and spent two and a half days taking a test, we only had pencils and no calculators. That CPA exam is a bitch. Let the sun shine in and don't sell something not worth what you say it is, that is called fraud.

[CutePuppy]

FASB Rule 157 (aka “fair value” or “mark-to-market”) should be suspended, but no, it alone will not solve the crisis.

Newt Gingrich has suspension of this rule as one part of his program to solve the crisis. It will stop credit ratings downgrades of otherwise solvent banks with good loan portfolio.

The real problem is that the market is frozen, not liquid, and nobody will take on the risk without knowing it’s backed by the entity that can hold this paper for a long time (till maturity or until it can be sold for a decent value when RE market stabilizes), the only entity being the government. Paulson is trying to inject liquidity into frozen market and “get it moving again”, there is no “fat cat bailout”. $700B is simply an oversized line of credit, most of which may not be used, some of it may go bad and some of it may make money because assets will be acquired on already discounted “fair value” basis, only not in the market in which “fair value’ equals Zero because nobody wants to risk or has capital to buy, even at discount.

Real crisis is only in 4 or 5 states, but in deflation everybody expects and waits for prices to go lower, so market is stalled. Of course, the goofy Dems’ proposals for judges rewriting credit card debts or mortgages, or “protecting” from foreclosure people who can’t pay the mortgage will only stop the market from functioning, i.e will make things even worse, with or without government line of credit, and thus entire plan would be worthless with these provisions.

With Fannie and Freddie finally explicitly nationalized, the bulk of “low quality” loans should be already taken care of. But paper for other banks is mispriced because market for it doesn’t now exist or function properly. That’s what Paulson is trying to solve, because it will not get solved by itself, even after much damage to the economy - most of which will spill over and be felt on Main Street, not Wall Street. We can do it now, or we can do it later, but access to capital is essential for capitalist society to function. Stupid government policies (CRA, FNM, FRE etc.) created the situation, they now need to solve it so capital can be “unclogged” and returned to the economy.

[Kellis91789]

Interesting. I don’t know that changing the mark-to-market rule and extending insurance to those mortgages would be enough. It might be. But most responsible banks have already issued financial statements that have reflected the drop in asset values based on the mark-to-market rule — when there is effectively NO MARKET. I don’t know that other financial institutions would believe their adjustments back to “cost” or paper-value. It would look like a scam. Maybe the Federal insurance of the paper would allay those doubts, maybe not. It is all psychological at this point.

[takenoprisoner]

Our congress is prepared to surrender the rule of law to intervene in order to influence the forces of capitalism.

If congress approves this request, it is an act of treason.

[ari-freedom]

the more I understand the alternatives and the paulson plan, the more I realize that these alternatives just aren’t enough.
When the doctor says you need surgery, OF COURSE you have to ask for a second opinion. But sometimes you really need major surgery.

[ari-freedom]

we had capitalism? where were you all these years?

[CutePuppy]

Our congress is prepared to surrender the rule of law to intervene in order to influence the forces of capitalism.

If you think of CRA or GSEs like Freddie and Freddie, where profits were private but debt was guaranteed by taxpayers, as "capitalism" and not direct intervention by Congress / Teasury into free market, then I don't know what you mean by capitalism. They are now unwinding (or at least trying to unwind) the pernicious effects of previous intrusions by the government into market economy.

[pray4liberty]

How We Can Clean Up A Lot of the Economic Problems

We can throw out the liberal Congress for starters and vote in people who truly value America and not their own money-lined pockets.

Vote them out, they caused this problem, we can't trust them to fix it!