So the Secretary of Tax Evasion is holding a press conference on Monday at noon (via Calculated Risk). The details are a little vague, but that will not stop me from coming unhinged over them.
At this point, the Obama administration appears to have settled on the most controversial aspect of the bad bank: pricing the toxic debt.
The government will buy toxic assets below the banks’ “carrying value,” which is basically market value, but not at fire-sale levels, the source said, representing something of a compromise.
Um, no. “Carrying value” is not “market value”. Carrying value is what you claim an asset is worth on your balance sheet. For example, if you sold me some “magic beans” in exchange for a cow, I would carry the beans on my books as being worth one cow.
Market value is what the market will pay for the asset. If nobody is later willing to buy my magic beans, the market value is zero. That is when I start screaming about “fire sale prices” and demanding the government trade me a cow for my beans, since that is obviously what they are “really worth”. And since I have good government connections, that is the initial plan.
But if the taxpayers understood what is happening, they might lynch somebody. So we have to make sure most of them do not understand. So we “compromise”, and the government (with the wisdom of Solomon) gives me half a cow and pretends the taxpayers are not getting ripped off.
Such a pricing approach will likely placate both taxpayer and Congressional concerns about the government overpaying for the assets. But, the source noted, it could “trigger an accounting problem for the banks,” presumably because the institutions will have to report a loss on the transactions.
Because I have borrowed so much against the beans — which I value as worth one cow — and then made a bunch of awful speculative bets, even to accept half a cow in exchange would force me to admit that my net worth is negative. Worse, all the people just like me will have to admit that their beans are not really worth a whole cow, either. This is called “mark-to-market accounting”.
The Obama administration is now working on ideas to address that, which might entail a temporary suspension of certain accounting rules. It is unclear what that might be, said the source.
So we will just pretend nobody ever sold any magic beans for less than one cow, and everybody holding magic beans can still carry them on their books at “hold-to-maturity value”.
Somehow, this will restore complete confidence in the system.
Man, I cannot wait to hear the actual proposal.
I can’t wait for the plan to be announced either. Dow may hit 20000 on Monday! (We know it can’t go to 5000 on the downside because they’ll stop trading to avoid the effects of panic. The effects of exuberance are fine, though, so upside potential is unlimited.)
I like what you said on CR about it. “They really should make it $999 billion and 99 cents. But only if you act now.” Now that had me ROTFL!
Ugh. I am not sure the cow and bean example is simple enough for these guys.
The Prez said he and his would always give the American people the straight story. Who exactly do they think they are fooling?
I want to know why the notion these mortgage-backed bonds are _really_ worth more than the market value holds so much sway. We don’t do that in other areas of business. Things are worth what a willing buyer will pay for them. Why are people willing to accept this bit about it just being a crisis of confidence?
How about this? Why doesn’t the government help create some sort of investment for supporters of this school of thought to buy shares of this pool of bad assets directly? Once everyone else realizes why these people already know, that these mortgages are going to be mostly repaid in full, those investors will earn a lot of money, and that will stimulate the economy.
No need to try and stay awake Monday…you can sleep peacefully all through the day.