Bailout and mark-to-market

Here’s the reason all these institutions are failing. Recent changes in the way that financial companies have to account for the loans on their books require them to value their debt at a “mark-to-market.”

This is a fancy way to say that whatever the market value of the debt is, that is what they have to say its worth. Now that the housing market is on the skids, a high risk, non-performing loan a bank made for $600,000 might only be sold for $400,000. Thus, that “loses” a third of its worth.
Remember that these are not really individual loans that we are talking here, but the CDOs that were packaged together and sold as asset-backed securities. But most people can more easily picture it in individual terms.

I do not support the government directly bailing out public companies. However, to prevent massive foreclosures and the resulting REAL pain from homeowners (yes, even silly ones who took on much more debt than they can repay), here’s an idea.

Until June 30, 2009, allow the government to refinance any home loan at today’s market value. The terms are really simple: 6% interest for ANY credit score, at 30 years, plus allowing up to 12 payments to be interest-only (pushing the loan out as many months).

We as taxpayers would eat a large chunk of change immediately; the loan mentioned above would cost $600,000 and we would only make P&I back slowly. But the taxpayers would recoup some costs over time and may even make money. With amount of bad debt of their backs, banks would not experience the credit freeze that they see now.

Part and parcel of this would be to change the mark-to-market rule. And hey, let’s throw in SEC rules to prevent ANY short selling while we’re at it.

Regards,
Trond