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New Twist


A fair market is the last thing the government wants to price these "assets."

Every time the government puts a deal together, there are adjustments. This is because every deal they're putting together makes zero economic sense; every deal is meant to provide the illusion of liquidity and solvency.

The PPIP will only be available to funds that currently own the same type of assets that the government wants the banks to get rid of. This in no way illustrates a fair market, which is the last thing the government wants to price these "assets."

These participants have every incentive to pay a higher price than what they are worth because the deal essentially just provides more leverage for their existing portfolio and it provides a put for additional inventory they buy. Most of these "assets" are related to mortgages in some way. As default rates rise (watch employment, which is looking worse and worse), these "assets" are worth less and less.

Today the FASB was somehow cajoled to finally loosen mark-to-market rules. In a twist not expected by bureaucrats, this reduces banks' willingness to even sell any of these assets at all, since they don't now have to mark them. So what does the government do? It then give a cut of potential profits back to the banks if they rise in price. And where does that cut come from…you guessed it: the taxpayer.

The government, mainly under Treasury Secretary Geithner -- who was head of the NY Fed when all this blew up -- seems to be only able to affect pricing in the short run. Fundamentals as indicated by year-over-year statistics (not diffusion) are clearly deteriorating.
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