Well now we have Uncle Sam borrowing up to $3 trillion to fund the TARP, TAFL, Financial Stabilization Plan, Stimulus Plan,and so on. The borrowed funds are being injected into the economy to stop the bleeding and start the rebuilding. But no matter what he does, the body economic seems to slough off the effort and continue its nose dive.
And the dive is steep. Our concern with home foreclosures due to bad mortgages has turned to foreclosures due to loss of job, a much more serious problem. The only hope to stem job loss is President Obama’s Stimulus Plan that will put people back to work. Keep your fingers crossed.
At the same time the players have now come to finally recognize what I have been saying since last summer, you cannot revive the financial sector without dropping the “mark-to-market” rules. The balance sheets of all financial institutions were damaged by marking assets to markets that did not exist. Instead of marking to markets they were marked to models that were no better than notional ideas. These models have devalued assets well below any realistic value. FDIC Chairman Sheila Bair complained that 98% of all banks holding 99% of all bank assets have sound balance sheets but all are being devalued by these notional ideas. This has been the crux of the financial meltdown.
Uncle Sam has sought to build markets to which assets can be accurately valued. However, this has proven to be a difficult process and in any case too slow to correct the situation soon enough. Now we hear a chorus of calls for temporary suspension or a hiatus in marking assets to the market. The importance of this is that suspending this practice will allow balance sheets of financial institutions to recover lost ground instantly.
So here we are some $3 trillion of new Federal debt and nine months of wandering in the wilderness coming back to the reality that we have to value our assets at more realistic values. My particular call is that we value all mortgages and mortgage based assets at the maturity value of the mortgages minus the actual foreclosure rate. In this one case the value of the assets would increase by an average of some 25%. The total value of mortgages on owner occupied homes is some $13 trillion thus a 25% up tick in valuation would add $3.3 trillion to the balance sheets of those holding those mortgages.
If you drop “mark-to-market” rules for ”securitized debt,” originally valued by various observers at some $15 trillion, and further, to the “credit swaps” issued to insure these securitized debt instruments originally valued at $55 trillion, we can see a massive upward valuation in balance sheets, on an order far beyond Uncle Sam’s ability to borrow and spend.
Perhaps even more important, the new efforts by the Feds revive the “securitized debt” industry depend on correctly valuing the new financial instruments that will be created. Uncle Sam is feeding $400 billion into Fannie Mae and Freddie Mac to issue new mortgages that the two now government owned operations will bundle into bonds and sell as “securitized debt.” As a complementary effort the Feds will open the new “TALF” plan to buy up and securitize other loans including auto loans, student loans, credit card debt, and certain commercial debt. No sense doing this if ”mark-to-market” rules make these new instruments crash and burn at takeoff.
I believe it is a damn shame that we have had to go through all this trauma brought about by erroneous valuations of assets. When there is no market, it is foolish to follow “mark-to-market” rules. All this does is allow “wunderkinds” to pull out their electronic Ouija boards to value assets and in the process destroy the economy. It is long past the time to get a firmer grip on valuations of assets. But maybe not too late.