sponger

The Bank Bailout Won't Save the Truly Insolvent Banks

Unless mark to market rules are suspended. It was marking to market when real estate peaked that allowed increased equity lines of credit, and now it is mark to market causing trouble on the opposing end. Unlike other businesses, real estate should not be valued quarter by quarter but decade by decade. At any rate the banks' real estate portfolio should be evaluated not on the asset value but on the performance to maturity value, wherein the asset is the mortgage contract, itself. That would cast WFC and many other banks portfolios in a very different and more positive light.

The U.S. Banking System is Effectively Insolvent

Marking to market in itself is not the problem, but assigning the current value of an asset to the balance sheet without considering historical value and future projections is the problem. It is as useless to assign the lowest historical value to a property as it is to assign the highest value.

Real estate value is not a moment in time but decades of time. To drive our mortgage institutions to insolvency by this valuation method is self perpetuating and self defeating. Real property needs to be valuated based on something like a ten year average. Doing so will not only prevent premature insolvency but it will stop banks from giving out unsafe equity loans based on the highest value as well.

The criteria used for assigning real property valuation needs to be
reconsidered. The current method is fundamentally flawed, but
it is carried forward in an effort to provide transparency and honesty.
However, it is a fundamentally flawed concept to apply it as the primary
criterion for institutional health. American society allows its regulators to move from one extreme to the other -- from making decisions based
on non disclosure to making them based on full disclosure as though
financial markets can survive the transition following the same set of valuation rules. At the very least, we can say a home is not really valued until it is sold.

Why This Bailout Can't Work - And What Will

Marking to market in itself is not the problem, but assigning the current value of an asset to the balance sheet without considering historical value and future projections is the problem. It is as useless to assign the lowest historical value to a property as it is to assign the highest value.

Real estate value is not a moment in time but decades of time. To drive our mortgage institutions to insolvency by this valuation method is self perpetuating and self defeating. Real property needs to be valuated based on something like a ten year average. Doing so will not only prevent premature insolvency but it will stop banks from giving out unsafe equity loans based on the highest value as well.

The criteria used for assigning real property valuation needs to be
reconsidered. The current method is fundamentally flawed, but
it is carried forward in an effort to provide transparency and honesty.
However, it is a fundamentally flawed concept to apply it as the primary
criterion for institutional health. American society allows its regulators to move from one extreme to the other -- from making decisions based
on non disclosure to making them based on full disclosure as though
financial markets can survive the transition following the same set of valuation rules. At the very least, we can say a home is not really valued until it is sold.

Why This Bailout Can't Work - And What Will

I do not understand what you mean in Item 6 when you recommend boosting asset valuation while writing down bad assets to market. Since much of the current problem derives from poor real estate valuations and performance of related mortgages, I believe the following comment conveyed to the House Finance Committee may be pertinent:

"It is no more realistic to valuate real property at zero [or nearly zero] worth because of a frozen market than it is to assign it value at its historicaly highest price, [whether] estimated or actual. A more realistic and practical measure of worth could be obtained by figuring an average over ten years or assigning a mean figure for that term. Value of almost any asset cannot be measured solely by one moment in time.

The FASB directive to mark to market at the latest and (in this case) the lowest price should be modified. Putting accountants in charge of the economy is just as dangerous as putting attorneys in charge of medical practice.

A program to help resolve the financial crisis by allowing federal acquisition of distressed assets at premium prices in order to inject liquidity into the banking credit system is a tacit admission of the inadequacy of the traditional FASB ruling. As excess inventory in the housing market is worked off in the next few years valuations will eventually return to normal and will climb higher than the premium prices paid by the federal program for those assets. That occurence will then validate the recommended change in FASB directives for real estate.

Read It and Weep for the USA

While I agree with many who object to the proposed legislation and question the constitutionality of it, I doubt that most people are aware of the gravity of the situation. If banks report they are illiquid it may mean they cannot open their doors for business. If they cannot issue new loans to consumers or business or successfully call in and close the outstanding loans on their balance sheet they cannot meet the test of sufficient reserves to redeem depositor money. I am all but certain that the central bankers, Paulson and Bernanke are dealing with a condition of that gravity. Under such a circumstance all bets are off concerning the preservation of constitutional principle. The life of the global financial system is at stake and must be saved at all cost.