Bernanke Signals U.S. Should Pay More for Bad Debt - GoFuckYourself.com

Barefootsies · 09-23-2008, 12:56 PM

Interesting...

Quote:

Sept. 23 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled that the government should buy devalued assets at above-market values to make its proposed $700 billion rescue package most effective in combating the financial crisis.

``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''

Bernanke's remarks, an unusual departure from his prepared testimony, come as lawmakers and the Bush administration negotiate a rescue plan aimed at easing the worst financial crisis since the Great Depression. The Fed chief said paying prices higher than the bad assets would fetch in the open market would help ``unfreeze'' credit markets and aid the economy.

Analysts said Bernanke is essentially advocating that government use a pricing model that assumes that the debt will be paid in full over a long period of time. That is different from the mark-to-market model used by investment banks that prices assets at what they are worth on a given day.

The risk is that the model does not provide transparent pricing of the assets taxpayers are taking on, said Ann Rutledge, partner at R&R Consulting in New York, a firm that specializes in structured finance. Many of the securities ``are not going to pay at maturity,'' Rutledge said.

Housing Recession

Nearly one in 10 mortgage loans are in default or delinquency and house prices have fallen for eight consecutive quarters, according to the S&P Case-Shiller Index. Paulson and Bernanke are betting that the asset purchases will free up lending and break a self-perpetuating cycle of tight credit leading to lower home prices and more defaults.

``Under the Treasury program, auctions and other mechanisms could be designed that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets,'' Bernanke said. There are ``substantial benefits'' to buying assets at a cost close to the ``hold-to-maturity'' price, he said.

Treasury Secretary Henry Paulson, who with Bernanke urged lawmakers to act on the plan quickly to address investor concerns at the deepening crisis, said the ``major focus'' of debt purchases would be mortgage-linked assets.

Seeking Flexibility

Paulson rejected an idea floated by Democratic Senator Sherrod Brown of Ohio for banks to retain some portion of the asset they sell to the Treasury.

``I don't think that that would be a successful way to deal with something systemically,'' Paulson said at the hearing.

Bernanke opposed efforts by banks to lobby regulators to remove mark-to-market pricing in their portfolios. A suspension of such accounting would hurt investor confidence, he said.

Anne Canfield, executive vice president at the Consumer Mortgage Coalition, an industry group representing mortgage lenders and loan-servicing companies, sent a letter to Treasury officials yesterday evening saying the bailout plan ``will only be successful if it leads to substantially higher prices'' for mortgage assets, according to a copy obtained by Bloomberg News.

``In past bailouts (Brady bonds, etc.), discounted Treasuries (zero-coupon bonds) have been used to create the perception that principal would be fully repaid,'' Canfield said in a letter to Acting Treasury Undersecretary Anthony Ryan and David Nason, an assistant Treasury secretary. ``Under mark-to- market rules it is more difficult to create such perception.''

Letter to Treasury

Treasury spokeswoman Brookly McLaughlin wasn't available for comment.

Merrill Lynch & Co. in July sold more than half of its mortgage-linked collateralized debt obligations for about a fifth of their original price, setting a price for those securities at that time.

Bernanke's remarks today indicate he favors paying above the market rate. ``We cannot impose punitive measures on the institutions that choose to sell assets,'' the Fed chief said today. ``That would eliminate or strongly reduce participation and cause the program to fail.''

``They are basically saying, `Let's take a best-case scenario, let's assume we don't have losses,''' said Julian Mann, vice president at First Pacific Advisors LLC in Los Angeles. ``Home prices continue to deteriorate. There are real losses here.''

Political Shield

The pricing method Bernanke is advocating would also provide a political shield, analysts said. Congress wouldn't be able to see if prices fell during a quarter, nor would they be able to push the Treasury to sell if they saw the value of the securities rise. That would also protect the market from the sense of an overhang if in fact the government did acquire a $700 billion pool of mortgage-related assets.

``The plan allows you to hold the assets off the market,'' says Bradley Hintz, former chief financial officer at Lehman Brothers Holdings Inc. and now an analyst at Sanford C. Bernstein & Co. Inc. It treats the Treasury as ``an investor with a perpetual life span, an infinite amount of money, and no commercial interests.''

http://www.bloomberg.com/apps/news?p...q5M&refer=home

Fletch XXX · 09-23-2008, 12:57 PM

Bernanke is a cool guy you can trust him, look at that smile

Barefootsies · 09-23-2008, 12:57 PM

Quote:

Originally Posted by Fletch XXX

Bernanke is a cool guy you can trust him, look at that smile

tony286 · 09-23-2008, 12:58 PM

I just heard on the radio to forgive all those mortgages ,give the people those houses would only cost 200 billion. So why do they need close to a trillion?

Barefootsies · 09-23-2008, 12:59 PM

Quote:

Originally Posted by tony404

I just heard on the radio to forgive all those mortgages ,give the people those houses would only cost 200 billion. So why do they need close to a trillion?

Some congressman's "oversight"....

topnotch, standup guy · 09-23-2008, 01:04 PM

Quote:

Originally Posted by tony404

I just heard on the radio to forgive all those mortgages ,give the people those houses would only cost 200 billion. So why do they need close to a trillion?

Now that idea would make too much sense, don't you think?

Snake Doctor · 09-23-2008, 01:04 PM

Quote:

Originally Posted by tony404

I just heard on the radio to forgive all those mortgages ,give the people those houses would only cost 200 billion. So why do they need close to a trillion?

Because in this scenario the government isn't actually "spending" the 1 trillion...at least not in the sense that we're used to the government spending money.

They're buying things that cost 1 trillion, that they plan to sell at a later date for most (if not all or more) of what they paid for them.

In a sense you should look at it more like a loan that will be at least partially repaid, and at best repaid + interest.

ADL Colin · 09-23-2008, 01:05 PM

Quote:

Originally Posted by tony404

I just heard on the radio to forgive all those mortgages ,give the people those houses would only cost 200 billion. So why do they need close to a trillion?

That's only part of the problem. For example, there are $62 trillion in credit default swaps out there. That is what brought down AIG. WAY too much leverage!

CIVMatt · 09-23-2008, 01:06 PM

Sorry I thought that said "Bukkake"

ADL Colin · 09-23-2008, 01:12 PM

Seems like it would be a lot cheaper to change the accounting rules. I think it is rule 157 that is requiring everyone to mark everything to market. Well, there is no market. banks only became required to use rule 157 about last year or so. Why not permit the banks and other institutions to carry the financial products at maturity value with some penalty for defaults that everyone agrees upon?

David! · 09-23-2008, 01:17 PM

Quote:

Originally Posted by tony404

I just heard on the radio to forgive all those mortgages ,give the people those houses would only cost 200 billion. So why do they need close to a trillion?

Bubbah buys a house for $100k
He finances it with Bank A.

Bank A then turns around and sell the mortgage paper to Bank B and the rights to service the original loan to Bank C.

Bank B then turns around and create a new derivative product. You now have a mortgage back security.

Hedge fund then buy the new security from Bank B and creates a new derivative product on top of the one Bank B created.

You now have 1 asset that is worth $100k that has been used to create 4 different securities.

Best case: Bubbah pays off his loan, all securities expire and everyone is happy.
Worst case: Bubbah bought a house for $100k that was really worth $50k, and now Bubbah can't make the payment anymore.

So you've got a $50k assets that has created $400k of problems.

OG LennyT · 09-23-2008, 01:18 PM

Bernanke is a fucking tool

09-23-2008, 12:57 PM	#2
Fletch XXX GFY HALL OF FAME DAMMIT!!! Join Date: Jan 2002 Location: that 504 Posts: 60,840	Bernanke is a cool guy you can trust him, look at that smile __________________ Want an Android App for your tube, membership, or free site? Need banners or promo material? Hit us up (ICQ Fletch: 148841377) or email me fletchxxx at gmail.com - recent work - About me

09-23-2008, 01:06 PM	#9
CIVMatt Amateur Pimpin Industry Role: Join Date: Aug 2004 Location: Orlando, FL Posts: 13,075	Sorry I thought that said "Bukkake" __________________ Make easy money with Webcams

09-23-2008, 01:12 PM	#10
ADL Colin Too lazy to set a custom title Join Date: Feb 2001 Location: Tube Titans, USA Posts: 11,929	Seems like it would be a lot cheaper to change the accounting rules. I think it is rule 157 that is requiring everyone to mark everything to market. Well, there is no market. banks only became required to use rule 157 about last year or so. Why not permit the banks and other institutions to carry the financial products at maturity value with some penalty for defaults that everyone agrees upon? __________________ Adult Date Link - $50 PPS starting NOW! -- good and JUICY! skype = "adultdatelink"

09-23-2008, 01:18 PM	#12
OG LennyT Wall Street Pimp Industry Role: Join Date: Jun 2003 Location: Phoenix, AZ Posts: 14,345	Bernanke is a fucking tool __________________ Tradeking - my online broker \| 4.95 a trade \| make real $$

09-23-2008, 12:58 PM	#4
tony286 lurker Industry Role: Join Date: Aug 2002 Location: atlanta Posts: 57,021	I just heard on the radio to forgive all those mortgages ,give the people those houses would only cost 200 billion. So why do they need close to a trillion?