Re: [RT] Paulson Plan, RealTraders Email List Archive

Valid points but the argument is that the market is not fairly valuing the assets at this time since the market has failed and is illiquid. Assets have different values in an organized sale, an auction, and a panic. Carrying them on the books at some arbitrary inflated value based on an over priced market at the time of acquisition is just as invalid as marking to market in today's environment. Perhaps a new mark to market rule that used a 50 or 200 day moving average would be more realistic. Thereby taking note of the market but ignoring the high daily beta that sometimes rattles things.

A 2nd not about the overall "fix"... We have taken over 3.6 trillion of fannie/freddie debt, spent 250 billion or so on fed bank takeouts, and now are talking about $700 billion for the latest action to remove credit/debt swaps from the market and balance sheets. This is already over 4.5 trillion dollars. As recent discussion about the $85 billion bailout for AIG demonstrated 85B/200million tax payers = $425.00 per adult in the USA. That can round off to about $500 per $trillion. multiply that by the $5 trillion or so the gov't will no doubt assume in debt to deal with the current problems before its all done and you have $2,500 per adult in the country. Liquidity could be added to the markets by pumping it into the economy from the consumer side by giving $2,500 in spendable script to each adult in the US. By doing it as spendable script it would not get stashed away as savings or to pay old bills but would only be useful to spend. Thus consumers would spend, those who are tight on mortgage payment money would have a supplement to carry them along, etc. Defaults would decline strongly, the economy would soar with businesses (and only domestic business at that) would gain sales and liquidity, housing markets would have time to stabilize with the shut off of more defaults for quite some time and all could bet back to a more normal environment where long term fixes could be designed to correct the structural problems in the system and could then have the time to be implemented and work slowly.

Yes, its purely inflationary or a redistribution of wealth or a combination of both. But then so are the other fixes being contemplated right now. This one targets main street instead of wall street and keeps the gov't layouts directed purely domestically and instantly builds confidence with each and every US adult as it puts spendable money in their pockets.

Boater805

At 09:34 AM 9/30/2008, you wrote:

I agree - suspending mark-to-market is crazy as is lending to the troubled institutions instead of buying their assets. I am surprised that analyst's don't evaluate the impact these alternatives have on the balance sheet. Selling insurance to those without any cash is also nuts. Where is the basic understanding of this issue? This is all about restoring confidence and weakening the balance sheet or increasing expenses is not the answer.

Jim

----- Original Message -----

From: Code 2

To: Pete Holt

Sent: Tuesday, September 30, 2008 8:05 AM

Subject: Re: [RT] Paulson Plan

I agree with John Mauldin's comments on asset valuation; however his

suggestion to suspend mark-to-market accounting is wrong.

It does not help investors, depositors or regulators to allow

financial institutions to overvalue their assets and therefore

overstate their capital reserves. And to make matters worse,

re-jigging reported asset values only when it is convenient to prevent

an institution from failing is just insanity.

Here's an example. I buy a house for $1 million and finance it with a

$900,000 loan. Let's say its value goes up to $1.2 million, so I

report that value on my credit application to the bank and borrow an

additional $180,000. A year later, the value of my house declines to

$600,000. Mark-to-market accounting says I must report a deficit of

($600,000 - $900,000 - $180,000) $480,000. Suspending mark-to-market

accounting says I continue to report $120,000 of equity. Which paints

the true picture? Oh, and following the suspension of mark-to-market

accounting, with my $120,000 of "equity," I convince you, an investor,

to put up $60,000 for an equity interest in my house.

An interesting benefit of Goldman Sachs and Morgan Stanley's recent

switch to bank holding companies was that certain assets no longer get

marked to market. They avoid reporting the decline in value of

billions of dollars of certain assets.

From: Pete Holt <peteholt@xxxxnet>

To: realtraders@yahoogroups.com

Date: Monday, September 29, 2008, 9:36:52 PM

Subject: [RT] Paulson Plan

This (from John Mauldin's Outside the Box) would seem to be the key

deficiency in the Paulson Plan. Don't see how this can be fixed in

the short run.

There is one practical problem that will plague the Paulson Plan and

any plan that involves the government purchasing distressed assets

from financial institutions. These assets are NOT(!!!) accurately

valued on the books of financial institutions.5 Accordingly, these

institutions are not in a position to sell them to the government at

current fair market value. Any sales at current market value would

inflict huge losses on these institutions. The alternative is for the

government to grossly overpay for these assets, which would constitute

a disguised capital infusion into these firms that would short-change

the American taxpayer. This flaw in the plan is why members of

Congress from both sides of the aisle insisted on some kind of

profit-sharing structure that would compensate taxpayers in the event

the government pays above-market prices for assets. HCM fears that

very little of the $700 billion is going to be spent in the near

future because of the reluctance of banks to part with assets at

anywhere near their current value, and the government's reluctance to

overpay for these assets.

5 Although in fairness all the blame for this can't be placed on these

institutions. There is currently no market for many of these assets

and placing a value on them would be an arbitrary exercise. This is

why mark-to-market accounting should be suspended for an indefinite

period of time.

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