mhspring

Paulson's Plan is About Marking to Market

Mark to current market has meaning if the securities are in fact for sale in the near future. Paulson has predicated his plan on analysis that there are 2 prices for MBSs: the current fire sale price and a hold to maturity post-panic price. Assume that he is correct. Consider the following as the start of an alternative to the currently proposed bailout package.
Why not let institutions separate their MBS holdings into 2 groups: hold for sale and hold for maturity. Held for maturity securities would be valued on the books at mark to model prices with impairment write-offs taken based on actual impairments. Held for sale securities would be marked to current prices. Any government purchase-based bailout would apply only to held for sale securities. An FDIC-like insurance program paid for by the participating institutions could be instituted to further bolster the value of the held to maturity securities group. Any institution wanting to move securities to the held for sale group from the held to maturity group would have to take an immediate write-down if this occurred before the panic has subsided. Other penalties could possibly be applied.
This proposal would significantly reduce the value of the securities that the government would have to purchase. It would reduce the number of institutions failing because of mark to fire sale market prices. It would buy the necessary time for the part of the current panic due to MBS valuations to subside.
Neither the above proposal nor, to my knowledge, any aspect of the currently proposed bailout package deals with credit default swaps in any way, shape or form. This form of toxic derivative waste needs to be dealt with as well since the notional value of CDSs is in the tens of trillions. CDSs were a major contributor to the failures of Lehman and AIG.