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Quote of the Day:
“At this point, Congress is being asked to support an uncertain entity,
costing an uncertain amount of dollars, for an uncertain duration – a
decision that will have implications for generations to come and
requires absolute certainty.”
– Congressman Jeb Hensarling, TX, and Chair of the House Republican Study Committee
Subject: This would be simpler than a bailout
A few simple words in an arcane regulation may be
a major cause of the current financial "crisis." Removing this
regulation would be simpler and cheaper than the proposed bailout.
Financial Accounting Standard 157 is a regulation imposed on businesses
by the quasi-private Financial Accounting Standards Board (FAS). This
rule is also incorporated into the regulations of the IRS and is
further enforced by the SEC and the FDIC. FAS 157 requires businesses
to mark down assets to the lowest price for which similar assets have
been sold in the market.
The jargon term for this regulation is "mark-to-market." Mark-to-market forces good securities to be valued at the same price as bad securities.
It's important to understand that a security may
be sold at a low price for many reasons. The firm selling the security
may simply need to generate cash, and be willing to take a loss for
that purpose. A security may also be sold for a low price because one
or more of the mortgages behind that security is in arrears or default.
But once a security is sold for a low price, something startling
happens . . .
All other firms are forced to pretend that their
mortgage backed securities are also worth that low price, even if none
of the mortgages backing their securities are in arrears or default!
This leads to a chain of catastrophic consequences . . .
Company balance sheets suddenly become
unbalanced. Credit rating firms downgrade the companies that suffer
this fate, resulting in margin calls, higher interest rates, and
falling stock prices. Firms that were having no trouble paying their
bills suddenly find themselves on the verge of bankruptcy.
This has happened repeatedly over the past few
months. In the absence of "mark-to-market" it's possible that no firms
would have gone bankrupt, or clamored for government funding.
Treasury Secretary Paulson and Fed Chairman
Bernanke have both been asked about the "mark-to-market" problem. They
have responded with jargon and gibberish. We suspect that it would be
highly embarrassing for government officials to admit that a federal
regulation has led to so much heartache for so many people.
House Banking Chairman Barney Frank continually
claims that the current problems were caused by deregulation. He, like
most politicians, have powerful incentives to always exempt the
government from blame. And many CEOs have powerful incentives to remain
silent about such things in order to retain access to government
favors. The fact is . . .
This
entire problem has been caused by government money and government
regulations, from the creation of the housing bubble to the bursting of
that bubble, to the current plan for a bailout.
Were the politicians to come clean about this
they might find their careers hanging from metaphorical lamp-posts. And
so they will not come clean, but will instead hide behind jargon and
gibberish and blame everyone but themselves.
Worse still, they will use their own failures to grant themselves more power.
Now, here is something truly stunning . . . The
current bailout plan could have unintended consequences as a result of
the mark-to-market regulation. The plan is designed to purchase
securities at the lowest possible price, using various tools, including
reverse auctions. But think about what this means. Under
mark-to-market all holders of similar securities will then be forced to
mark down their securities to that lowest possible price, potentially
driving many more firms toward bankruptcy, and into the arms of the
federal bailout.
Instead of lifting the markets the bailout plan could actually cause a race to the bottom.
Here's what we need to do. We need to continue to
oppose the bailout, and to ask for an end to the "mark-to-market"
regulation. This would be a simpler approach, and should be tried
first. We have created a new "reduce regulation" campaign that you can
use for this purpose. Ask for an end to "mark-to-market" in your
personal comments. You can send your message using our proprietary Educate the Powerful System.
Meanwhile,
the House has used the distraction caused by the Big Bailout to sneak
through an additional $25 billion bailout of Detroit automakers.
Fortunately, we still have time to block this in
the Senate, so please send a message to both the House and the Senate
opposing this bailout. You can use our generic campaign to cute spending for this purpose.
Please also consider making a contribution or monthly pledge to help us weather the economic downturn. You can contribute here.
Thank you for being a part of the growing Downsize DC army.
Jim Babka
President
DownsizeDC.org, Inc.
D o w n s i z e r - D i s p a t c h
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