With everyone having separate press conferences, it looks like a showdown is looming. Over what, is the question.
GOP INSISTS ON ANTI-COMPETITIVE, ANTI-FREE MARKET PROVISIONS
The SEC appears set to have the authority to suspend mark-to-market accounting requirements. So much for taking expert testimony. The question then becomes whether institutions will be required to say whether they are on "suspension", when, and how ...
The only rational, game-theory choice is for every institution to apply for suspension straight away, unless they intend to make non-suspension a competitive point in the marketplace. The SEC, being the industry push over during times of GOP administration and more, will likely oblige.
The numbers from banks and financial institutions will be LESS transparent, not more. I guess we didn't purchase "safety and soundness", if we are willing to have a "secret closet", still.
The problem here is that the Congress has given too much leeway. They might have specified what types of instruments (e.g. those that are now know to be distressed?), what types of circumstances, and limited the amount of time an organization can be on creative-accounting "workout". Such "workouts" are, of course, inherently anti-competitive and anti-free markets. In a way, they "protect" managements (some of whom are still paying out large dividends to shareholders during "system crisis") ...
Notice also that adding in the suspension of mark-to-market to the legislation is a direct repudiation of the central premise (or selling point...) of the Paulson-Benanke plan: liquidity and price discovery. We will have those, on their calculus, but we will suspend the accounting that goes along with that. Go figure.
SHOOT YOURSELF IN THE FOOT
The government is going to buy mortgages. The Bill says the government can modify the terms of the loans it buys. That will no doubt cause them to be worth a lot less, in the short run if not the long run, too.
Does the insurance and the lookback provision (to get repaid for losses after 5 years) cover that much risk? One doubts it. [Even the language of the bill calls them "projected losses", rather than "realized, recognized and projected" ...]
Why not have the Treasury make bids at or near only at the prices that it would observe IF the loan modifications were already made? Afterall, only an idealist would buy something they intended to modify so that it was worth ... less.
SHAREHOLDERS FIRST
Only if you need mouth-to-mouth from the Treasury, do you have to abide by compensation limits. If you just sell your securities to the government, they are off your back. You can keep paying your shareholders huge sums in cash, and collecting it from Uncle Deep Pockets Sam. {Update: conflicting reads of the Bill make this inference tenuous. Stay tuned.}
LAWSUITS
If you are one of 1,000 small banks and you don't get "serviced" right away by Treasury, file a lawsuit.
tbc...
Sunday, September 28, 2008
Some Bailout Provisions ...
