Krugman doesn’t think much of the latest Geithner plan. Surprise, surprise.
Notice that the government equity stake doesn’t matter — the calculation is the same whether private investors put up all or only part of the equity. It’s the loan that provides the subsidy.
And in this example it’s a large subsidy — 30 percent.
We are sort of puzzled, however, that he hasn’t fixated more on the effect the plan, and the inflated marks it could create, will have on related assets that are stuck in mark-to-market mode, and that this may be the Treasury’s real goal. After all, imagine the multiplier the Treasury is getting this way. Consider:
Agency and non-agency mortgage backed securities outstanding were about $7.5 trillion in late 2008. If a mere 10% of these are currently afflicted with the evils of mark-to-market accounting because they have become Level III assets (we can’t help but think of Schedule III narcotics whenever we see that), the Treasury is in a position here to buoy up marks on $750 billion in assets with the use of $50 billion in capital. (Assuming half the $100 billion PPIP program is used on the Securities rather than the Legacy Loan side of the problem and that the figure stays at $100 billion for the entire program). Plug in your own figure for the amount of subsidy you think the Fed’s leverage is putting on the marks and do your own calculation as to the effects.
We think the plan is just re-inflation (and we bet the Administration really wishes Krugman would shut up about this subsidy stuff) but at least it seems it might be effective re-inflation.
Geithner plan arithmetic [The New York Times]
If you dozed off for just a second, you missed it.
Federal Reserve Chairman Ben S. Bernanke said accounting standard-setters need to figure out how the mark-to-market rule blamed for worsening the global financial crisis should be followed when assets aren’t readily traded.
The rule, which requires companies to write down assets every quarter to reflect market value, is “a good principle in general” and shouldn’t be suspended entirely, Bernanke told the House Financial Services Committee today. “Accounting authorities have a great deal of work to do to try to figure out how to deal with some of these assets, which are not traded in liquid markets,” he said.
Yes, indeed. If numbers aren’t looking like what we want, we’ll just make up some numbers and call it all good. Perfect!
Tim Geithner was seen to nod vigorously from the Green Room where he watched today’s testimony, until an aide whispered to him that Ben wasn’t talking about tax returns.
Bernanke Says Mark-to-Market Accounting Rule Should Be Improved [Bloomberg]
You will be relieved to know that this whole subprime thing is WAY overblown. I have it on good authority. I know what you are thinking. Really, good authority. Oh yeah? How about the Bank of England? Yeah, that Bank of England. See, this “mark-to-market” thing, bad idea.
While market-based estimates and the write-downs announced by firms may be unduly pessimistic, if such concerns persist there is a risk they could become self-fulfilling.
[...]
In that environment, firms may find that previous mark-to-market loss estimates have been overstated and some writebacks of reported losses may occur.
Bank of England Votes for Mark to Model [FT Alphaville]
MBAs
“Other Than That, I Have No Concerns”m
By Bess LevinContinue reading »
Tags: CPA v. MBA v. CFA, do it in the middle of the night, don't tell anybody, FASB, Mark-to-Market, other than that I have no concerns, stop asking for public comment on this crap