It’s at least worth looking at. Â I was listening to Dave Ramsey this afternoon, and he mentioned the possibility of suspending the mark-to-market rules for the subprime industry temporarily. Â After all, there isn’t actually a 78% default rate on mortgages is there?
In other words, mark-to-market accounting–not the reality of the economy or the actual credits–has created much of the financial turmoil that has shaken the world. Imagine if you had a $200,000 mortgage on a $300,000 house that you planned on living in for 20 years. But a neighbor, because of very special circumstances, had to sell his house for $150,000. Then, imagine if your banker said you had to mark to this “new market” and give the bank $80,000 in cash immediately (so you would have 20% down) or lose your home. Would this reflect reality? Not at all. Would this create chaos? Absolutely.
And it is happening all over Wall Street.
If you’re as disturbed as I am about having this bailout crammed down your throat based on fear, contact your representatives and mention the possible alternative of suspending mark-to-market rules temporarily. Â While that may not be the ideal situation, it’s better than every man, woman, and child in the US ponying up $2,500 of debt to bail these guys out.
I’ll update this post later with a link to a podcast that explains how this would work.Â Â Here’s theÂ Dave Ramsey Podcast
4 Replies to “A Possible Bailout Alternative?”
Part of the problem is that the mess is so complicated. I don’t understand the situation you’re describing, even though I haven’t lost most of my brain cells yet. I have a friend who’s been a stock broker in Boston for about 40 years. He shocked me when he told me that he doesn’t really understand what’s going on.
If I understand…
Book values spiraled down when everyone tried to liquidate at the same time because values got tied to daily market values instead of what true market value would be over the long term. Because the books said these assets (subprime mortgage bonds) were falling in value, everyone tried to dump, which drove the price down even further.
Add to that the fact that all these firms were 30x levered due to artificially low interest rates set by the fed, so they were hurting in the liability column as well.
I don’t know much about economics outside of stuff I’ve read–no “official” training, so anyone feel free to correct what I’ve said if it’s off base.
Of course, Warren Buffet said this morning that he’d buy it all if he had $700B.
With All the credit default swaps going around, no one wants to lend or move paper. Everything is frozen, and almost no one has equity. Even if you put down, money, you may very likely be upside down. The next year should be very interesting.
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