Bank Nationalization and Mark to the Market
The Obama Administration has still not come up with a plan to remove
troubled assets from the balance sheets at banks.
Therefore, their
solution appears to be "semi-nationalization," as evidenced recently
when the US Government and Citigroup agreed to convert the preferred
shares held by the government into common shares. The US Government
will soon own approximately 36% of Citigroup, which is about as aclose
as you can get to nationalizing a bank without coming right out and
saying it.
I don't like changing the rules of the game in mid-stream, but
something drastic needs to be done. A terrific opinion piece was
written in the Wall Street Journal recently by Peter Wallison.
If you click on his name, you can see his very impressive resume.
Graduate of Harvard Law, adviser to Nelson Rockefeller, adviser to
President Reagan, General Counsel to the US Treasury, Wallison has the
credentials.
Wallison asks a very important question as the thesis of his
article. Accounting rules are very important, and should not be bent.
This situation appears exceptional, but that does not mean there will
be other exceptions in the future. It is a dangerous precedent. What
most commentators and other media are missing is this important twist.
Wallison writes:
What happens, then,
when there is virtually no market for these assets - as has been true
for at least a year? In that case, accounting rules require the banks
use whatever market indicators are available.
What will this imply for other banks that are in trouble, or soon fall into trouble? How endless is the money supply?
I agree with Wallison's approach...nationalizing the banks is a
terrible solution. Revisiting mark to the market needs to become a
priority. And Wallison writes:
...Both taxpayers and
banks could come out well - and so would our economy - if the
government were to buy the assets at their "net realizable value,"
which is based on an assessment of their current cash flows, discounted
by their expected credit losses over time.
Take a look at the article here (printed in the Wall Street Journal February 25, 2009). Additionally,
suspending mark to market can effectively replace another cash infusion
from the Government. It is worthy of consideration.
Thomas Mullooly is the owner of Mullooly Asset Management, LLC, NJ Fee Only Investment Advisor, providing guidance for your 401k account. Mullooly Asset is a fee-only alternative to stockbrokers and financial planners.
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