James Saft
Reuters
September 26, 2008
The U.S. “hold-to-maturity” bailout 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.
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Ben Bernanke, the chairman of the U.S. Federal Reserve, told lawmakers that 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,” he said, trying to persuade a skeptical Congress that the plan he and Treasury Secretary Henry Paulson Jr. have been pushing will give value for taxpayers’ money.
Banks are forced to mark their assets to market, a process that has become increasingly painful and is likely to lead to bank failures as a shortage of investors and the swiftly declining performance of the underlying collateral have driven prices lower. Since many securities are so complex that they seldom trade, 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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