Monday, March 23, 2009

Good For The Gander, Not The Goose

Today is day of celebration in the market as investors take comfort in the government's latest Plan. It should be a day of outrage toward government bureaucrats and politicians that have now blessed the very actions that they demonized over the past two years and crippled the world's financial industry.

Bank earnings, capital ratios, and stability have been destroyed by mindless adherence to Mark-To-Market accounting. Despite the pleas that there was not a functioning marketplace and that the cashflow value of the securities, when held to maturity, was greater than their distress value, regulators turned a deaf ear.

Now with the financial industry in disarray, the government is performing a rescue. They are rescuing an industry that would not need rescuing had there been leniency early on. Banks asked for permission to mark illiquid assets at a value determined by likely cashflows since they would hold till maturity or until prices recovered. What is the government's plan? Buy the securities and hold till maturity or until prices rebound! The government doesn't mark-to-market because they set the rules. Banks had to reduce leverage and maintain capital ratios throughout this debacle. The Feds have embraced leverage that would make a hedge fund manager quake in his boots, but that's OK. Capital ratios also are of no importance since they are the saviors from our government.

Some serious thought and forbearance from regulators could have allowed the banks to accomplish the same thing that the Geithner Plan is attempting, but two years ago with much less pain and anguish. A half a decade ago Wall Street bankers ran into trouble and ample embarrassment when they peddled securities by "putting some lipstick on that pig." Now our government has dressed up our gander in top hat and tails two years late. It's not time to celebrate, it's time for outrage.

1 comment:

Rob said...

What will keep these banks from taking some of the TARP money they already received, putting it in these funds to bid up worthless assets on their books?

Imagine if I'm IOU Bank who took $10 bil in TARP money. I use $2 bil of that, am matched with $22 bil in Treasury/FDIC-guaranteed money. I'm an approved manager so I will run the fund myself.

I go out and bid on a pool of $24 bil of toxic securities that my friends and I helped put together. Oh, did I tell you that they're only held at $20 bil value on my books. Or that they're only bid at $5 bil by the free market?

No matter, the most I can lose is $2 bil I put in, so let's BID THEM UP.

So for $2bil in contribution, I get back $24bil in cash for nearly worthless securities that I couldn't hope to get rid of before.

This is the new form of SECURITIZATION!!!

Oh, and now I can give back $5bil of TARP money also since I just got $24 bil in the door.

who will be the watchdog to make sure this selfserving BS isn't going to happen?

Too bad no one will listen to us.

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