Treasury Secretary Tim Geither’s plan to create a public-private partnership to buy bad assets from banks (which the editors rightly panned) took a couple of blows today. The first came from the relaxation of mark-to-market accounting rules that Veronique and Iain have been blogging about. The accounting change will make banks less likely to want to sell their mortgage-backed assets to the partnership, as this piece in yesterday’s Journal explained:
Once the new accounting rule takes effect, banks will have new incentive to keep the assets directly on their books, say bankers. That is because the rule states that banks can use their own judgment on asset values as long as there are no willing bidders to set a market price. […]
That seems to run counter to the Treasury plan, which could spend up to $1 trillion to remove impaired assets from banks’ balance sheets.
I’m ambivalent on the mark-to-market change — I think forbearance with regard to regulatory capital requirements for some banks might have worked just as well — but I’m for anything that makes it harder for Geithner to rip off the taxpayers.
The second blow to Geithner’s plan came from hedge-fund manager Ray Dalio, who wrote a letter to his investors explaining why he would not be participating. He nailed a lot of the problems with the plan, including the problem of “political risk”:
Then there is the issue about the political risk, which we are more concerned about because there will be such a limited number of managers being allowed to participate in this program that it raises possibilities (or at least perceived possibilities) of them colluding because they all know each other. Either these investments will make a lot of money for their investors or the government will lose a lot of money — in either case, there will be reasons for politicians to complain and to focus on the five winners to see how they “abused” the system.
Smart money managers will not willingly pin targets on their chests for Congress to shoot at.