Minyan Mailbag: The Market Is Broken
Time to get out the toolbox.
Editor's Note: The following is a discussion begun when reader Minyan Bill wrote to Prof. Zucchi regarding his take on A Better Bailout.
Rather than revoke mark-to-market rules, the Feds should institute a price control regime for the wounded mortgage-backed securities (MBS) currently held by banks, etc.
The initial controlled price for any given segment would likely be Boom Boom Ben Bernanke's "Hold to Maturity" price -- i.e., something "guesstimated" using trailing 3-month actual performance (how much interest is actually being paid and how much principal is actually be lost) and best guesses as to housing sector performance across the coming year or so.
Then the controlled prices would be adjusted every quarter, based on the same thing: no market input at all, as the market for MBS is broken.
We've been pursuing "price discovery" on these things for 15 months and in the process are burning down the city. Using price controls in this way would likely juice the balance sheets of the wounded institutions a bit at first.
If, after time, the MBS don't perform decently, the controlled prices would trend back down toward current (non-) market values. Fine. The pain would be disbursed across time and a stabilized operating environment.
The playing field (for these MBS vintages) would be level. The marks and balance sheets would be transparent and public. Short campaigns based on rumor would have a hard time getting off the ground. The wounded bonds would live out their lives in peace.
And if it turns out the MBS perform better than today's (non-) market values imply, so much the better.
The benefits of this approach are:
- No Treasury investment: just a lot of spreadsheeting and regulation
- Slight initial juicing of bank etc balance sheets
- Transparent, level-playing field environment for these wounded MBS: stability.
- No covert "rescue" of FASB, "accounting violators," etc., who currently are holding MBS on books at marks above levels the accounting rules require. (That is, the Paulson Plan -- assuming the "hold to maturity" price is above today's (non) market values -- would be exchanging cash for non-compliant marks (and the wounded bonds attached). This is a dirty little secret side to the plan that I never see discussed.
- And, needless to say I hope, price controls would be preferable (transparent, level field) to simply REMOVING the accounting rules and allowing individual managers to mark by model or whatever.
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