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.

Market Skepticism About BofA / Merrill Deal

I have no particular insight into whether the BAC-MER merger will succeed but I do know that the pararagraph "The market responded to this deal with as stunning a vote of no confidence as you will ever see. Inquiring minds are asking for proof. It comes in the form of 10 minute charts." illustrates the central problem with our current financial environment. Our problem is the instant judgement of day traders whose time horizon is measured in milliseconds is taken as long term investment advice. It will take a few years to see whether the merger has or has not worked . The value of the stock then will reflect its success or failure. The 10-minute price chart of the stocks on the first trading day after the merger is announced is relevant only to someone with a correspondingly short time horizon.

Fannie, Freddie: Beyond the Balance Sheets

If both GSEs are allowed to go under what happens to the US mortgage market? What entity will step in to perform their function of buying mortgages from originators? I suspect that there would be a significant period of time during which the housing market would come to a screeching halt because only those who don't need a mortgage to buy a home would be able to get one and then at a significantly higher rate. Wat would happen to our economy then? What would happen to all of the banks who count GSE pfds and bonds as part of their capital?
In an ideal world, there would be no GSEs. We don't live in such a world so we are stuck with them and have to keep them afloat at least until the housing market recovers. The common could go to zero but the consequences of letting the pfds go bust will be dire of the loss of bank capital.
BTW: how much of the current crisis is caused by institutions having to mark-to-market securities that are clearly being held to maturity?