0 votes

Here's more ammunition when you call your congressional representatives:

I just received this e-mail from Downsizer Dispatch:

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.

DownsizeDC.org




Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

That rule was changed in January of this year in order to

allow some flexibility regarding the contraction mentioned in the posted letter, but the results have not followed the stated intent.

A tiny little phrase was changed in one of the rules. When asset values are rising, MTM values (that's Mark To Market) reflect a higher net worth of assets and this fuels balance sheet "growth" and, thereby, credit expansion which in turn creates more demand for financial assets.

This accounting slight of hand was allowed to come about as a result of a new rule put into place by the Securities and Exchange Commission (SEC). It is generally known as accounting rule SFAS 157 and it became effective as of January 1 of this year (2008). It requires companies, subject to certain restrictions, to classify financial assets as Level 1 (easily valued by reference to market prices), Level 2 (doesn't trade actively, but similar enough to actively traded assets that can be valued in relationship) and Level 3 (known in the trade as "mark to model" or more accurately: "mark to make believe"). Some financial firms opted to comply with SFAS 157 early, which led to quite a few investment banks revealing that the value of their Level 3 assets exceeded their actual net worth; that is, their real net worth in the real marketplace according to the operation of this rule.

In the last several months, there has been increased worry that mark-to-market accounting leads to the operation of a so-called destructive "financial accelerator." As prevailing values go down, banks have to lower the value of their holdings. This process leads to a direct hit to their net worth, which will lead them to contract their balance sheets, either by withholding credit or selling assets. More sales in a weak market will naturally lead to further declines in the prices of financial instruments, leading to more write-downs and sales of inventory.

It seems altogether strange that nobody had a problem with mark-to-market rules when asset prices were rising.

The SEC's solution for the contraction version of this dynamic is simple: ignore (lie about) those market prices if they are too ugly. From the SEC release comes the following:

"Fair value assumes the exchange of assets or liabilities in orderly transactions. Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale."

The difficulty here is that virtually any sale could, in the judgement of the securities firm, be considered to be a "forced liquidation", if it so chooses to apply that term.

_________________________________________
"An economy built on fiat money is a society on its way to ashes."

_________________________________________
"An economy built on fiat money is a society on its way to ashes."

I got the same thing and sent to my reps, but...

check this out.....It's a response someone left on downsize.org. What a GREAT idea! Imagine if 200,000,000 citizens received all of this cash. The economy would go CRAZY! Yea, I know, it would still do more to ruin the value of the dollar, but it's still pretty ammusing!

I'm against the $85,000,000,000.00 bailout of AIG.

Instead, I'm in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.

To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18+.

Our population is about 301,000,000 counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..

So divide 200 million adults 18+ into $85 billion that equals $425,000.00.

My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.

Of course, it would NOT be tax free.

So let's assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes.

That sends $25,500,000,000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife has $595,000.00.

What would you do with $297,500.00 to $595,000.00 in your family?

Pay off your mortgage - housing crisis solved.

Repay college loans - what a great boost to new grads

Put away money for college - it'll be there

Save in a bank - create money to loan to entrepreneurs.

Buy a new car - create jobs

Invest in the market - capital drives growth

Pay for your parent's medical insurance - health care improves

Enable Deadbeat Dads to come clean - or else

Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.

If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ( "vote buy" ) economic incentive that is being proposed
by one of our candidates for President.

If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+!

As for AIG - liquidate it.

Sell off its parts.

Let American General go back to being American General.

Sell off the real estate.

Let the private sector bargain hunters cut it up and clean it up.

Here's my rationale. We deserve it and AIG doesn't.

Sure it's a crazy idea that can "never work."

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85 Billion

We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC

And remember, This plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.

Ahhh...I feel so much better getting that off my chest.

PS: Feel free to pass this along to your pals as it's either good for a laugh or a tear or a very sobering thought on how to best use $85 Billion!!
By slipjig at September 25, 2008 01:26 PM (EDT)

Check your math
To the person who posted the first response, 85 billion dollars divided by 200 million people is $425. Not $425,000. There must have been a misplaced decimal somewhere.

"The only thing we die with is our own personal integrity!" LRH
Vail, CO
Freedom and Liberty for Eagle County, Colorado. www.flecc.org

KEEP FIGHTING!!!

__________________________________________________
Don't waste time with frauds Obama, McCain, Nader or Barr - join the Campaign For Liberty! http://www.campaignforliberty.com/ The Constitution is more important than voting for the evil of 4 lessers

_____________________________
"Make the lie big, make it simple, keep saying it, and eventually they will believe it." -- Joseph Goebbels

ABA Levels New Blast at Fair Value

The bank lobbying group tells the SEC that marking an asset to an illiquid market does not show it's true value: CFO.Com

"Many holders of assets are restrained from selling, because they know the economic values of their assets are greater than the distressed sale values they are seeing in the marketplace," wrote Edward Yingling, president and CEO of the ABA, in the letter, addressed to SEC Chairman Christopher Cox.

As reported on Nation Public Radio, there are over 50 million mortgages in the US, the default mortgages are 1.3 million. The ratio is not great enough to undermine the economy, only the greedy bankers.

PyraBang for Liberty

PyraBang for Liberty