Taxpayers Lose: Mark To Market
The Financial accounting Standards Board caved to pressure by the banks and has loosened mark to market standards for banks reporting capital for regulatory purposes. Though these banks are still leveraged institutions who might have too sell assets unwillingly in order to meet their debt obligations, they no longer have to confront the reality of the current market place for the complicated mortgage and asset backed securities on their balance sheets.
At the same time, Timothy Geithner has launched his Public/Private Investment Partnerships as an attempt to create a new buyer's market for these securities. The deal is: the government gives private investors a non-recourse loan worth 93% of the auction price of these securities. The government then buys an equal amount of securities alongside a private buyer like PIMCO or Blackstone. Since we're giving the private investors free money to play with, the hope is that the investors will be willng to pay higher prices for the assets.
The hope is that investors and the government will pay prices that are high enough that the banks can sell at a slight mark-up to current prices but that aren't so high that the buyers overpay and take a bath. Since the private investors only put up 7% of the capital, they don't have much to worry about. But the Treasury risks losing much more if it overpays -- the loan made to the pirvate investor plus the equal investment made by Treasury. Overpayment can mean a bloodbath for the taxpayer.
Now back to mark to market -- free from the realities of the market place, bankers can now hire auditors to develop sophisticated models for what these securities might be worth in fantasy land. This frees the banks up to hold out for higher auction prices from Geithner's partnerships.
The Treasury plan was always meant to inflate these asset prices a bit. But ending mark to market will inflate them as well. Put the two together and one of two things will happen: Banks will simply hang onto the securities, happily mark them to fantasy and then "shockingly" fail when reality intrudes or they will use this leeway to demand ever higher prices from Geithner and his pals, causing the partnerships to overpay and once again leaving the taxpayer with the bag.
Sucks.
At the same time, Timothy Geithner has launched his Public/Private Investment Partnerships as an attempt to create a new buyer's market for these securities. The deal is: the government gives private investors a non-recourse loan worth 93% of the auction price of these securities. The government then buys an equal amount of securities alongside a private buyer like PIMCO or Blackstone. Since we're giving the private investors free money to play with, the hope is that the investors will be willng to pay higher prices for the assets.
The hope is that investors and the government will pay prices that are high enough that the banks can sell at a slight mark-up to current prices but that aren't so high that the buyers overpay and take a bath. Since the private investors only put up 7% of the capital, they don't have much to worry about. But the Treasury risks losing much more if it overpays -- the loan made to the pirvate investor plus the equal investment made by Treasury. Overpayment can mean a bloodbath for the taxpayer.
Now back to mark to market -- free from the realities of the market place, bankers can now hire auditors to develop sophisticated models for what these securities might be worth in fantasy land. This frees the banks up to hold out for higher auction prices from Geithner's partnerships.
The Treasury plan was always meant to inflate these asset prices a bit. But ending mark to market will inflate them as well. Put the two together and one of two things will happen: Banks will simply hang onto the securities, happily mark them to fantasy and then "shockingly" fail when reality intrudes or they will use this leeway to demand ever higher prices from Geithner and his pals, causing the partnerships to overpay and once again leaving the taxpayer with the bag.
Sucks.
