The Corner

Mark-to-Mark, Direct Re-Capitalization, etc.

Steven Pearlstein is always worth reading these days. Here’s his bottom line on mark-to-market:

There is an easy compromise here: Require banks to disclose market prices right alongside their own estimates of “fair value.” Let the investors decide which to rely on.

And the idea of trying to recapitalize the banks directly:

Many academic economists argue that if taxpayers are going to rescue the financial system, their money should be used to recapitalize the banks in exchange for preferred stock or stock warrants, just as Warren Buffett did with Goldman Sachs and General Electric.

In fact, the much-maligned House bill would have given the Treasury secretary wide latitude to use any portion of the $700 billion to recapitalize financial institutions before they failed, in exchange for stock or stock warrants, just as the government did when it took control of Fannie Mae, Freddie Mac and AIG.

But recapitalizing the banking system would require much more than $700 billion, and involve the government in the ownership of hundreds of institutions. It would also be much less cost-effective than the Treasury strategy of jump-starting the market in mortgage-backed securities, which would bolster the finances of almost every bank, whether or not they wound up selling into the government-funded auctions for those securities.

Given the widespread fear of lending to or investing in banks until the full extent of their lousy lending becomes clear, there’s a good chance that injecting large amounts of government capital wouldn’t do much to attract additional private capital, or even get banks to begin lending again.

What we’ve got on our hands is a big, hairy, complicated mess. Beware of smooth-talking salesmen with hidden agendas peddling magic potions.

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