Why the US Bail-out Plan Will Hardly Solve the Financial Crisis

Posted By Anders On October 3, 2008 @ 00:18 In English, Euromed | 2 Comments

 
The Mark-to-market rule ([1] Wikipedia): “Mark-to-market" is an accounting methodology of assigning a value to a position held in a financial instrument based on the current market price for the instrument or similar instruments.
For example, the final value of a futures contract that expires in 9 months will not be known until it expires. If it is marked to market, for accounting purposes it is assigned the value that it would fetch in the open market currently."

[2]

[3] Financial Times.com, 2 Oct, 2008: The credit crunch "will restrain economic activity for the next three quarters even with the approval of the [US government] bail-out plan," said Jane Caron, chief economic strategist at Dwight Asset Management.

[4] Wall Street Journal Oct. 1, 2008: Because of government bureaucracy and legal issues, the first purchases by the Treasury plan will not be made for at least two weeks and possibly four weeks.
Mark-to-market accounting changes could start the healing overnight and prevent the U.S. from moving further away from free-market capitalism.

The most amazing paradox of 2008 is the continued growth of the U.S. economy and the sorry state of the U.S. financial markets. Despite major financial-market problems, real GDP has increased by 2.1% in the year ended in the second-quarter

The economy is not the cause of financial-market problems.
Most of the loans that have been going bad in recent months would have gone bad even if the economy had been growing twice as fast. So what is to blame for the "worst financial crisis since the Great Depression"?

The answer seems simple. Mark-to-market accounting rules have turned a large problem into a humongous one.
A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value.

Firms that are otherwise solvent must price assets to fire-sale values. Not only does this make them ripe for forced liquidation, but it chases away capital and leads to a further decline in asset values.
[5] [6] For example, the prices of assets on the books of Washington Mutual, when it was bought by J.P. Morgan at a fire-sale price, were cited as a reason to mark-down the assets on the books of Wachovia. This, some say, forced the FDIC /Federal Deposit Insurance Corporation) to arrange Wachovia´s´S sale to Citibank.

The same is true of what happened to Fannie Mae and Freddie Mac, which had positive cash flow when they were nationalized by the Treasury.

Here's something you won't believe: Fannie Mae and Freddie Mac have not drawn a dime from the Treasury's $200 billion facility that was created to bail them out.
[7]
It was the use of mark-to-market accounting that allowed Treasury to declare them bankrupt. On a cash flow basis, they were solvent.

Mark-to-market accounting causes so much mayhem because it forces financial firms to treat all potential losses as if they were cash losses. Even if the firm does not sell at the excessively low price, and even if the net present value of current cash flows of these assets is above the market price, the firm must run the loss through its capital account. If the loss is large enough, then the firm can find itself in violation of capital requirements. This, in turn, makes it vulnerable to closure, nationalization or forced sale.

Because the government has been so aggressive with the use of these capital regulations, private capital has been scared away.

Just about the only transactions taking place in the subprime marketplace have been sales to private equity firms that do not have to mark assets to market prices.
Their investors agree to commit capital for the long haul, and because they are able to bend the current holders of these assets over the knee of the accounting rules they get prices that virtually guarantee a huge profit.

Despite all this evidence, the government has yet to provide relief from mark-to-market accounting.
However, the Financial Accounting Standards Board will meet today to discuss potential changes

[8] In Europe we have the[9] Basel II regulations.
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.
Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

[10] The Guardian Sept. 30, 2008: A European Union directive passed in 2001 and adopted as a new accounting standard in the UK in 2006 dictates that banks have to value their assets on a daily basis. To do this they must base their calculations on the market value of each asset if it were liquidated that day.
The problem with this is that as share values tumble in response to the credit crisis, millions of pounds are wiped off bank balance sheets causing a spiral of decline in asset values.
The Tories are calling for a three-month suspension of the regulation to ease pressure on banks.

The EU will not change it
[11] EU Commissioner Charlie McCreevie on 1 October 2008 on the EU's proposal to the European Parliament and Council of Ministers: Liquidity provisions are similar to the ongoing work of the Basel Committee for Banking Supervision and the Committee of European Banking Supervisors.

Companies investing in securities can use their investment decision only after full and careful consideration that have been duly taken. Otherwise, there is very high capital requirements.

Banks can onlylend or deposit a certain sum of money with other banks, while credit-taking banks will be subject to limitations on how much and from which bank they can borrow money.

Comment

This is is the New World Order: Economy is healthy. In that situation the illuminist vultures let the real estate bubble implode that CFR-member, Chairman of the FED Board, Alan Greespan, enabled through cheap loans by lowering interest rates to near 0, as well as CFR-member Bill Clinton´s irresponsible insisting on [12] subprime mortgages.
Now they have swiftly raised interest rates dramatically and withdrawn credits to investment banks.
Thereupon, mortgages became nearly valueless, because people go bankrupt. And due to the Mark-to-Market requirement the assets of many banks nosedive on a daily basis, so that the statutory capital of these banks becomes too low.

[13] By means of  e.g. the FDIC and the illuminist Secretary of the Treasury, [14] Henry Paulson such  banks  are then declared bankrupt allthough they have plenty of liquid capital to pay for their current transactions and thus are fully solvent in our eyes!!!

No wonder:Paulson is former CEO and chairman of Rothschild daughter Goldman Sachs and on the Board of  the IMF, which the EU trade Commissioner, bilderberger and T[15] rilateral Commissionist Peter Mandelson,  wants to look after our money!
Moreover Paulson is on the Board of  Rockefeller´s Bilderberger Club and a Member of Rockefeller´s Council on Foreign Relations.

In this situation mistrust spreads, banks dare not lend - not even to each other - the flow of money to circulate freezes in the banks!
This will eventually stifle economy , too.
Most larger European banks are losing lots of money on their subprime investments in the USA.

The only firms not subjected to the mark-to-market rule belong to  the New World Order Vultures like  Rothschild agent J.P. Morgan. Whereupon these vultures can buy  “bankrupt” banks for a song.
And so did J.P. Morgan and John D. Rockefeller after the [16] Wallstreet Crash in Oct. of 1929, which they themselves had brought about!

And don´t forget: Money is accompanied by power over "our" politicians!

Thank you, [17] EU Referendum, for the tips

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Article printed from Euro-med: http://euro-med.dk

URL to article: http://euro-med.dk/?p=2495

URLs in this post:
[1] Wikipedia: http://en.wikipedia.org/wiki/Mark-to-market
[2] Image: http://euro-med.dk/billeder/vultures%20III.jpg
[3] Financial Times.com, 2 Oct, 2008: http://news.yahoo.com/s/ft/20081002/bs_ft/fto100220081523423940;_ylt=Ao.Grl80Zmf9w2S6tFXuHKys0NUE
[4] Wall Street Journal Oct. 1, 2008: http://online.wsj.com/article/SB122282734447293049.html?mod=googlenews_wsj
[5] Image: http://euro-med.dk/billeder/Morgan_logo.jpg
[6] Image: http://euro-med.dk/billeder/Chase_logo_pre_merger.jpg
[7] Image: http://euro-med.dk/billeder/vultures.jpg
[8] Image: http://euro-med.dk/billeder/vultures%202.jpg
[9] Basel II: http://en.wikipedia.org/wiki/Basel_II
[10] The Guardian Sept. 30, 2008: http://www.guardian.co.uk/politics/2008/sep/30/davidcameron.conservatives
[11] EU Commissioner Charlie McCreevie on 1 October 2008: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1433&format=HTML&aged=0&la
nguage=DE&guiLanguage=en

[12] subprime mortgages: http://euro-med.dk/?p=2387
[13] Image: http://euro-med.dk/billeder/federal-reserve-board-logo.gif
[14] Henry Paulson: http://ceoworld.biz/ceo/2008/09/19/a-review-on-henry-paulson-ben-s-bernanke-and-timothy-f-geithner-p
lan/

[15] rilateral Commissionist Peter Mandelson: http://www.bibliotecapleyades.net/archivos_pdf/tlc_2006.pdf
[16] Wallstreet Crash: http://www.fdrs.org/banking_history.html
[17] EU Referendum: http://eureferendum.blogspot.com/