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GM Finally Dies - Does the U.S. Have Similar Symptoms?

The fact that Bush, in trying to reform Social Security did not draw the parallel to the defined benefit plans that were killing traditional manufacturing behemoths amazed me. I think you are, unfortunately, on point: Until "entitlement programs" (what a name in a capitalist system) are changed to defined contibution plans, we will be heading for trouble.

Banks Just Don't Get It

The major problem appears to be that many "toxic" assets are toxic in name only and banks do not want to be forced to part with them at fire sale prices.

U.S. Bank Shares: Pump Almost Over, Get Ready for the Dump

I enjoyed the phrase "massive dilution" without any perspective on what you consider "massive". Is that 30%? or 1%? or something in between?

FASB Changes Perpetuate Fair Value Lying

The "lying" was really in forcing banks to book paper losses before they occurred (and when they might never occur) on illiquid assets based on a temporary market crisis. This killed the banks and perpetuated the crisis. Lifting Mark to Market will be hailed as the turning point for the economy. Not all will be rosy from here, but this allows the markets and the marketplace to heal. Some banks will and should fail, but for the most part this was a fictional crisis crated by two stupid rules: mark to market as applied to the banks and the elimination of the uptick rule.

The FASB Rally: More Dishonest Breathing Room For Banks

The "dishonesty" was really in forcing banks to book paper losses before they occurred (and when they might never occur) on illiquid assets based on a temporary market crisis. This killed the banks and perpetuated the crisis. Lifting Mark to Market will be hailed as the end of this crisi period. Not all will be rosy from here, but this allows the markets and the marketplace to heal.

Bank Liabilities: Why the Discussion Isn't Explicit

Get rid of mark to market and magically solve the problem.

We Cannot Afford to Wait to Recapitalize U.S. Banks

The best way to re-capitalize the banks is to suspend the mark to market rule which is distorting values and dsetroying balance sheets. For example, assume you were a bank that had only one asset: a 10 mil mtg with a 6 % interest rate. Your borrower is rock solid and pays each month in advance. Your practice is to hold loans to maturity. Even though your asset is not impaired, because there is no current liquid market for mortgae paper and since everyone "knows" mortgages are toxic, you must "mark" this fully functional performing asset at 50cents on the dollar -- or less, taking a drastic and completely artifical hit to your balance sheet. Further, there can be no resumption of a market for the mortgages, because any potential buyer who is subject to the mark to market rule cannot buy this fully functional asset at value becaue of the hit the buyer will then have to take to their balance sheet. Mark to market after a market collapse of the market distorts the asset values and creates a self perpetuating negative dynamic. It is nonsense and it is destroying our banking system, our economy and our wealth.
They will finally do away with the rule -- but too late. Tremendous damage has been done and it is accelerating.

The NY Times on Bank Nationalization

Best solution is the one proposed by Forbes: Return to sanity. Get rid of Mark to Market for Banks, let them recognize losses when they occur (ie loans go into default) rathe than making them take fictitious paper losses that destroys the capital base because loans "might" go into default.
FDR suspended mark to market in 38 and it was not reinstituted unitl 2007.
These "insolvent" banks have more cash on hand then they have had in a long time. It is the unrealized "paper losses" that are killing them. One should note that Jamie Dimon has refused to sell JPM's "toxic" assets because they are not toxic -- only temporarily without a market. If forced to sell, they become a real loss. If held to maturity they are probably worth close to par. After the great depression, the Feds 1) suspended mark to market for banks because it distorts asset values if the market becomes illiquid and 2) instituted the uptick rule to rein in short sellers.
Those actions were reversed in 2007 and look where we are.

About Insurance and Other Antitoxins for Toxic Assets

The real underlying problem is the mark to market rule which has unnecessarily made banks look insolvent on papaer creating a self-fulfilling negative feed back loop. The process has gone something like the following: 1) Alt A and other subprime products start having higher default rates. 2) "Experts" suggest that the problem may creep into other mortgage classes 3) Subprime loans are termed "toxic" 4) Soon alomost all mortgage products are called "toxic" (no one knows what that means or cares except that it makes the products kryptonite) 5) PERFORMING AND NON-PERFORMING ASSETS ARE TREATED THE SAME, ie AS IF WORTHLESS. 6) The market for these assets tanks -- no one wants to pay the cash flow value for an asset they now have to carry on their balance sheets as if it were worthless 7) bank capital ratios tank -- they have to treat mortgage paper as if it were worth 22 cents to 40 cents on the dollar EVEN IF THERE HAS NOT BEEN ONE EVENT OF DEFAULT 7) Banks, understandably do not want to sell an asset whic is performing perfectly and generating the anticipated cash flow for the price they would get if it were in fact in default 8) People like Rubeni get on CNBC and announce that banks are "insolvent" because they have to value their mortgage holdings as junk whether they are junk or not 9) Due to an artificial valuation rule the banks have to raise capital to meet ratios even if their actual dollar losses are minimal 10) It looks like the the banks are in fact insolvent (even if the actual cash flows are still good) 11)The stock prices tank reinforcing the scenario 12) The vulture investors scream for nationalization knowing they wll make a killing if the banks are forced to cave in and sell good assts at bad prices. THE ANSWER: Let banks carry on their bools the mortgage assets based on performance and ACTUAL CASH FLOWS, not on the fictious "market price" when the market has temporarily disappeared and no one really wants to sell now ayway.

Guaranteeing Bank Stock Prices Is Not the Answer

The real underlying problem is the mark to market rule which has unnecessarily made banks look insolvent on papaer creating a self-fulfilling negative feed back loop. The process has gone something like the following: 1) Alt A and other subprime products start having higher default rates. 2) "Experts" suggest that the problem may creep into other mortgage classes 3) Subprime loans are termed "toxic" 4) Soon alomost all mortgage products are calld "toxic" (no one knows what that means or cares except that it makes the products kryptonite) 5) PERFORMING AND NON-PERFORMING ASSETS ARE TREATED THE SAME, ie AS IF WORTHLESS. 6) The market for these assets tanks -- no one wants to pay the cash flow value for an asset they now have to carry on their balance sheets as if it were worthless 70 bank capital ratios tank -- they have to treat mortgage paper as if it were worth 22cents to 40 cents on the dollar EVEN IF THERE HAS NOT BEEN ONE EVENT OF DEFAULT 7) Banks, understandably do not want to sell an asset whic is performing perfectly and generating the anticipated cash flow for the price they would get if it were in fact in default 8) People like Rubeni get on CNBC and announce that banks are "insolvent" because they have to value their mortgage holdings as junk whether they are junk or not 9) Due to an artificial valuation rule the banks have to raise capital to meet ratios even if their actual dollar losses are minimal 10) It looks like the the banks are in fact insolvent (even if the actual cash flows are still good) 11)The stock prices tank reinforcing the scenario 12) The vulture investors scream for nationalization knowing they wll make a killing if the banks are forced to cave in and sell good assts at bad prices. THE ANSWER: Let banks carry on their bools the mortgage assets based on performance and ACTUAL CASH FLOWS, not on the fictious "market price" when the market has temporarily disappeared and no one really wants to sell now ayway.

Foreclosure Moratoriums: It's Time to Get Real

The answer is to create affordability with a new functional mortgage product. The "problem mortgages" are primarily those with rate reset features. The best approach is to bring down payments by making the loans longer duration. The government should use the 350 TARP balance to give a capital backstop to Fannie and Freddie. Those entities should then offer "special mortgages" to all non-conventional borrowers (altA, Adjustable rate, interest only, etc.) Those loans should have a 45 yr amortization and offer a rate fixed for 15 yrs at todays rate (lets say, 5.1%). Only those who are not in default more than 2 mos and who can demonstrate an ability to pay the new mortgage would qualify. You do not look to LTV on the refinanced loans since you are simply replacing existing mortgages. No "cash out" financing would be allowed. The possible shortfall on future foreclosures of thes loans is guaranteed by the 350 B FNE, FME backstop created from TARP funds. You then get new performing loans. Much of the "bad" paper will be refinanced with performing loans which eliminates the old CDS and similar products, and allows a new round of functioning securitization of paper. The banks capital gets replenished and the fininancial system starts functioning again. Further, history shows us that in 10 years or so, real estate will have again staged a dramatic upswing such that almost all home values will exceed the values which existed in the recent bubble. Accordingly, the current paper losses form home value declines will diminish or be eliminated when the fixed rate runs out. If the housing market starts functioning again, most of these "special mortgages" will be paid off thorough a sale or refinance before the 15 yr reset occurs.

Nationalizing the U.S. Banking Sector: There's No Choice

Perhaps, as Jamie Dimon suggests, the reason the banks are not selling their "toxic assets" is because they realize that the media hysteria is causing them to be improperly undervalued. Rather than sell at firesale prices, the banks would rather hold onto them and wait for sanity to return to the market.

A Solution for the Bad Asset Pricing Problem

I have a proposal for resolution of the current housing/foreclosure/su... mess: Fannie Mae and Freddie Mac guaranteed long amortization loans to permit refinancing of unconventional loans into viable fixed rate loans given without reference to current loan to value ratios. This would lead to a rehablilitation of “toxic” mortgage paper and reflation of bank capital ratios. Best of all, it can be accomplished with minimal cost and risk to the taxpayer.
The current problem initially arose from borrowers in unconventional mortgages who were being squeezed by an increase in their rates and without an ability to refinance either because they cannot find a loan they can afford or because their homes are depreciated in value. They went into foreclosure creating a downward pressure on home prices. As home prices were pushed down, others found that their equity no longer supported the loan they wanted. This was accentuated by layers of securitization. The mortgages were branded as “toxic” and the cancer spread into the perception of conventional mortgages causing a freeze in the mortgage securities market and in lending. Banks simply cannot lend because their mortgages are considered “toxic assets” that have to be devalued by mark-to-market rules that do not function in a dysfunctional market causing a hit to the bank’s capital requirements.
The answer is to break the cycle and recreate a vibrant mortgage market by creating reasonable loans to qualified individuals that the market can in fact “bank”on.
Most people do not want to walk away from their homes and want to avoid foreclosure at all costs. Answers involving forcing banks to take a capital loss on the loans and refinance with a lower equity value seem motivated by a desire to punish the bankers and can result in a windfall to homeowners. It seems tough to justify forcing the lenders to absorb the losses caused primarily by a market collapse, particularly when market collapses are often followed by a return of value. This is particularly true of the real estate market which tends to run in 10 to 15 year pricing cycles. It is almost inevitable that in 10 years most if not all homes will reach or exceed the values attributed at the peak of the last real estate rice boom. Accordingly, the most efficient answer is not the forced recognition of losses now, but a system which allows people to stay in their homes with mortgages they can pay and allow tie to address the value issue.
To accomplish this, the treasury should create a mortgage reparation plan utilizing the GSEs they now control. The Treasury should dedicate about 300 Billion of the remaining bail out funds to capitalize Fannie and Freddie Mac. These funds will be the entities capital base to address liquidity/confidence issues. The GSEs would then offer special mortgages to persons who: 1) currently have a mortgage other than a 15 year or 30 year fixed mortgage; 2) are not more than 2 payments behind on their current mortgage; 3) are living in the home in question as their primary residence; and 4) can establish an ability to afford the payments on the new mortgage. The terms of the special mortgages would designed to assist affordability: They would be 45 year mortgages offered with a rate fixed for 15 years at a fixed rate based on current market rates, and after 15 years the rate would reset at the then current rate. Qualification would be based on ability to pay under those terms. The loan amount could not exceed current mortgage debt (i.e., no “cash-out” loans) and the loan would be available without reference to the home’s current value.
The 45 year term would lower monthly payments substantially to make the mortgage affordable. The fixed rate would alleviate the problems of adjustable rate resets. The loan is fair to the homeowner because they are able to stay in their home with an affordable monthly payment. They are not forced to take the loss in home value occasioned by market conditions, nor is the bank. Banks would get capital infusions as mortgages are paid off. The number of foreclosures should then move toward more normal levels. With time, the market would reflate, and the homeowner could refinance or sell at their leisure. Under this scenario, most of the special mortgages would not reach the 15 year rate reset, and for those that did, the homeowner would probably have more and better options than are available today.
The GSEs, solvent and with a restored market confidence would be able to float bonds supported by the new mortages, and backed by the 300 Billion capital infusion which would be dedicated as a capital reserve for the mortage program. Once in place, the program should allow the bleeding to stop and permit time to heal the wounds our housing market and financial system has suffered.

A Proposed Admirable Response to the Crisis

The true problem in the credit crunch seems to be the accounting rule requiring mark to market. By making people write down assets because there is a temporary market lock up is ridiculous. Any asset priced a s if it must be sold tomorrow rather than in an orderly fashion (hold to maturity value discounted for market interest expectaions) causes the stated "value" to crater. Once the process starts, it snowballs. CDOs and similar products can not be valued because the market dried up. There is no market because everyoe is afraid of what the "mark to market" requirement will do to their balance sheets. If we get rid of the "mark to market" rule, the market will return, and stabiltiy will come back to the financial markets. Such an approach avoids the need to have the government create and finance a market.

Government Bailout: We Are All Keynesians Now

The true problem in the credit crunch seems to be the accounting rule requiring mark to market. By making people write down assets because there is a temporary market lock up is ridiculous. Any asset priced a s if it must be sold tomorrow rather than in an orderly fashion (hold to maturity value discounted for market interest expectaions) causes the stated "value" to crater. Once the process starts, it snowballs. CDOs and similar products can not be valued because the market dried up. There is no market because everyoe is afraid of what the "mark to market" requirement will do to their balance sheets. If we get rid of the "mark to market" rule, the market will return, and stabiltiy will come back to the financial markets. Such an approach avoids the need to have the government create and finance a market.