It’s like a classroom project from 1st grade (alright, 2nd).
Assignment: Re-liquidise the banking system.
Method: Re-capitalisation of the banks.
Tools: A magic marker and 300 pads of Congressional notepad paper.
No one should be surprised to find this then, in the latest version of the Emergency Economic Stabilization Act (HT taxloss):
Section 132. Authority to Suspend Mark-to-Market Accounting.
Restates the Securities and Exchange Commission’s authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and protects investors.
By using hold-to-maturity prices, Paulson was practically doing this already. Against advice from the likes of Warren Buffet and Bill Gross, he wants to pay above market prices for banks’ toxic assets. Banks will then be able to use those prices as a theoretical floor to rebuild their balance sheets.
Only it won’t be a bottom, really. It will be an artificial bottom - like they sell in the plastic surgery-prone enclaves of Brazil. It will be in fact, what banks have been crying out, rightly or wrongly, for already — a de facto suspension of mark to market. That’s the magic of Paulson’s marker.
Of course, the Treasury Sec has to give a nod to existing rules, so this homework assignment is in the Act too:
Section 133. Study on Mark-to-Market Accounting.
Requires the SEC, in consultation with the Federal Reserve and the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings.
