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Hold-to-Maturity is the new Mark-to-Myth: James Saft | Special Coverage | Reuters
LONDON (Reuters) - Paulson and Bernanke's 'Hold-to-Maturity' plan is really just the new 'Mark-to-Myth', and even its heroic proportions are not likely to paper over solvency problems in the banking system.

The Federal Reserve Chairman told lawmakers the plan to spend $700 billion to buy up bad assets would allow banks to avoid unloading loans at fire sale prices.

"Auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets," Ben Bernanke said, trying to persuade a skeptical Congress that the plan he has been pushing along with Treasury Secretary Henry Paulson will give value for taxpayers' money.

Banks are forced to mark their assets to market, a process that has become increasingly painful and likely to lead to bank failures as a shortage of investors and the swiftly declining performance of the underlying collateral have driven prices lower.

As many securities are so complex that they seldom trade, and given that few want to buy them now anyway, banks sometimes must mark the assets according to modeled prices, a process sometimes referred to as 'marking-to-myth' by doubters.


If it is a subsidy, what not call it one?

And though $700 billion is a lot of money, it is not enough to wipe the slate clean and leave banks with workable balance sheets; the plan only works if that $700 billion, which equates to far less in terms of capital relief, is leveraged by attracting new money from outsiders now sitting on the sidelines.

But I find it hard to credit that the sovereign wealth funds of the world, having already been burned though their disastrous investments in banking last year and this, will feel that a price arrived at through what promises to be an opaque process gives them the confidence to buy in now.

"It is hubris to say they are going to set the prices and everyone will just mark to market their assets accordingly," said Tim Brunne, a credit strategist at Unicredit in Munich.


Alternatively, the government, which has bottomless pockets and no liquidity risk, may simply arrive at a price based on what it, or its advisors -- and one wonders who they could be and if they saw this whole disaster coming -- think is a fair bet on what repayment flows will be.

There is also the issue of protecting the taxpayers, who may justifiably argue that they should share in the benefit of any subsidy offered to the industry in return for footing the bill.

But taking equity stakes in banks in exchange for below market funding or asset sales probably would, as it did with Fannie Mae and Freddie Mac, choke off any hope of new equity infusions from actual investors seeking profits.

It's easy to understand why the United States is placing a low value on moral hazard and is considering an apparently indiscriminate reward for those who took too much risk.

The stakes are very high, and a disorderly deleveraging will be worse than an orderly one, even if the orderly one isn't perfect.

The debate about what whether or not the U.S. will need a massive intervention of public capital into its banking system and wider economy is over. The crisis requires a huge outlay of public funds, both to clean up after the many banks that will fail and to soften the blow to homeowners and consumers.

mark to myth, indeed...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Sep 25th, 2008 at 02:42:56 PM EST
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