Will the Fed bailouts fix solvency problems in the banking system?
*Reuters, by James Saft, September 25, 2008
Hold-to-Maturity is the new Mark-to-Myth
“Paulson and Bernanke’s ‘Hold-to-Maturity’ plan is really just the new ‘Mark-to-Myth’, and even its heroic proportions are not likely to paper over solvency problems in the banking system.
The Federal Reserve Chairman told lawmakers the plan to spend $700 billion to buy up bad assets would allow banks to avoid unloading loans at fire sale prices.
‘Auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets,’ Ben Bernanke said, trying to persuade a skeptical Congress that the plan he has been pushing along with Treasury Secretary Henry Paulson will give value for taxpayers’ money.
Banks are forced to mark their assets to market, a process that has become increasingly painful and likely to lead to bank failures as a shortage of investors and the swiftly declining performance of the underlying collateral have driven prices lower.
As many securities are so complex that they seldom trade, and given that few want to buy them now anyway, banks sometimes must mark the assets according to modeled prices, a process sometimes referred to as ‘marking-to-myth’ by doubters.”
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