Tuesday, September 23, 2008

Bernanke to Congress: Please Use Fantasy Prices

From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke signaled that the government should buy devalued assets at above-market values to make its proposed $700 billion rescue package most effective in combating the financial crisis.

``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''

Bernanke's remarks, an unusual departure from his prepared testimony, come as lawmakers and the Bush administration negotiate a rescue plan aimed at easing the worst financial crisis since the Great Depression. The Fed chief said paying prices higher than the bad assets would fetch in the open market would help ``unfreeze'' credit markets and aid the economy.

Analysts said Bernanke is essentially advocating that government use a pricing model that assumes that the debt will be paid in full over a long period of time. That is different from the mark-to-market model used by investment banks that prices assets at what they are worth on a given day.

The risk is that the model does not provide transparent pricing of the assets taxpayers are taking on, said Ann Rutledge, partner at R&R Consulting in New York, a firm that specializes in structured finance. Many of the securities ``are not going to pay at maturity,'' Rutledge said.

This is 100% pure crap, bullshit or whatever else you want to call it.

1.) These are not "firesale" prieces. They are the prices the current market will tolerate. Has it ever occurred to anyone why these assets are priced where they are? They're crap. It's that simple. But ol' free market Ben and laissez faire Paulson won't have any of that market stuff when an investment bank might actually have to lose money.

2.) What Ben is essentially saying is, "please pay a price that has no one has any possibility of ever getting for this paper. That will make everything better. Really." Over pay, screw the taxpayer, and bail out wall street for their really stupid ways.

3.) Consider that most of these assets are backed by mortgages. Also consider that that delinquencies are increasing. Take a look at this chart from the latest Quarterly Banking Profile from the FDIC


This plan is pure bullshit. Plain and simple.

UPDATE: A comment noted that I used incorrect phrasing on the mortgage issue. Mortgage delinquencies are increasing, but most are not delinquent.