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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.

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.

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.

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.

Paulson/Bernanke: $700 Billion at 'Hold to Maturity' Pricing

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 markte 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 afrraid 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.