Treasury Secretary Tim Geithner’s $1 trillion Public-Private Investment Program will likely explode already-surging taxpayer liabilities while doing little about — and possibly even worsening — the tightening of credit and valuation of toxic assets.
As increasing numbers of Republicans and Democrats have recognized, no matter how much the government spends on bailouts, mark-to-market accounting rules continue to spread the credit contagion and are a major obstacle to true price discovery of assets like mortgage-backed securities. But, unfortunately, like the Bush administration, Geithner and the Obama team have so far balked at doing anything substantial to provide relief from mark-to-market accounting mandates
Knowledgeable observers, from conservative Steve Forbes to Democrat stimulus proponent Mark Zandi, agree that mark-to-market relief is essential to unclogging the arteries of the credit system. At a House Financial Services Committee hearing earlier this month, Democrats like Ed Perlmutter (Colo.) and Capital Markets Subcommittee Chairman Paul Kanjorski (Pa.) demanded that the Financial Accounting Standards Board change Financial Accounting Standard 157, enacted in 2007, which forces banks to take paper losses, even on performing loans, based on the last fire-sale price.
Mark-to-market suspension or relief — such as regulatory agencies like the FDIC not subtracting “paper” mark-to-market losses against banks’ regulatory capital — would cost taxpayers virtually nothing and let the market value these assets with private money at what the government is now planning to pay for them. Financial institutions could buy these discounted securities at a true “market” price without worrying about a future mark-to-market paper loss eating away at their regulatory capital that determines how much they can lend.
Without mark-to-market reform from the SEC and/or the bank regulators, the buying initiatives Secretary Geithner outlines today could actually make the problem worse. As I had said of Bush Treasury secretary Hank Paulson’s original plan to buy mortgage securities (which he abandoned in favor of buying bank stock, an equally bad idea), if the government sets the price of asset securities too low, it could spread the contagion mark-to-market losses even further. If it sets the price too high, taxpayers will lose out.
Given the arbitrary 90 percent tax hikes on AIG bonuses the House of Representatives passed last week, many private-sector participants may anticipate that any government money will be weighted down with the strings of overregulation and de facto nationalization. But for taxpayers and the free-market system, this may not be the worst thing. The Obama administration’s forthcoming regulatory modernization should not shackle entrepreneurs who want to operate without this government aid.
It’s not too late for the Obama administration to use its political capital push to reform mark-to-market rules such as FAS 157 that are acting as a stranglehold on the financial system. Changing accounting rules to allow banks to price assets more rationally during a liquidity crisis would indeed be a change we could believe in.