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Geithner's Plan.. Mark-to-Market, Who Gets Screwed?

Politics / Credit Crisis Bailouts Feb 20, 2009 - 11:32 AM GMT

By: Andrew_Butter

Politics Best Financial Markets Analysis ArticleGrowing up I had a girlfriend whose family had once owned a string of retail outlets in Bavaria (that's in " Germany " ( Europe )). One day her dad told me his story. A few years before the war a local Party Official came round to the house and proposed to his dad that in return for selling him all those stores for 100 Reichsmarks he would help the family get out; the alternative was a bunch of very cheap train tickets, cattle-truck class.

That was a pretty good price "mark-to-market" at the time.

Anyway, so he sold up. Unfortunately the official didn't have the clout that he said he had, so only my girlfriend's dad and his mum got out. When he went back after the war to try and get the stores back (which by that time had been sold on twice). He got told, "Sorry that was a legal transaction".

For us kids who grew up in "the Best of All Beautiful Worlds", it's hard to believe that something like that happened in living memory, in a "civilized" country; like ours.

But only takes a few good leaders to get a crowd of us humans to go along with mass cruelty, particularly when there is fear…and profit to be had. All you need is someone to blame.

Who was to blame?

It's easy to forget that the world financial system is a complex construct made by humans, easily as complex a Space Shuttle.

On 28th January 1986 the Challenger Space Shuttle blew up a few seconds after launch. The dimensions of the solid fuel booster rockets that blew were by a random "twist of fate" dictated by the dimensions of the standard rail track in USA (they were transported by rail), which were the same as the ones in UK, which were the same as the axle of a standard carriage at the time rail was invented (they adapted the horse drawn carriages).

Which were the same as the ruts on the Roman roads, which were exactly the dimensions of the backsides of two horses bred to pull chariots in Ancient Rome.

Because of the dimensions of the rocket, the design of the "O-ring" seals between sections was problematic and they were only rated to perform above a certain temperature. There was a light frost the day before and an engineer refused to sign off the launch to go because of this; but he was overruled by his manager.

The rating agencies who signed off on all those AAA bonds, know all about that sort of thing, in the REAL WORLD you get paid more to say "YES" than you get paid to say "NO".

And BOOM!!

So who was to blame? If the backsides of those horses in Rome had been smaller, well nothing might have happened.

Sure blaming the bankers is popular, just as blaming the “Jews” was popular when explaining the misery before the war. But was it (a) right or (b) productive?

More likely in 1987 a decision was made to measure the "shelter" component of CPI in USA by "rental equivalence". Anyone who knows anything about valuation, knows that was insane, rental property accounts for less than 10% of the value of housing in USA and only poor people rent, you don't do a valuation of ducks by finding out things about donkeys; the rental market has a completely different dynamic from the owner-occupier market. Then the droning economists allowed interest rates to be set lower that the "real" inflation, then we had lift-off...then BOOM!!

So where are we now? We had a leak of propellant; all we need now is a spark!

Geithner's vauge plan

So that's it? Hand over trillions of dollars of financing to a crowd of bozos who know nothing about how to value Toxic Assets, and to get them to use this money to bid for those assets, thereby creating a "market".

Great plan, but that doesn't change the fact that it is highly likely that the bozo's won't know what they are doing (how many people do you know who can be relied on to value a toxic asset properly when the market is not working, and "quick-time").

By Timothy says…" Oh NO!! We will have a pre-qualification".

GREAT.... " You bid for that one Bob, and I'll bid for the other one...ha-ha, plenty to go round!!"

Either (a) they will pay too much (and the taxpayer will get screwed), or (b) they will pay too little, all of the banks will be declared insolvent, the buyers will make windfall profits, and wait for it...the taxpayer will get screwed.

Great plan, if you do you get screwed and if you don't you get screwed!

How insolvent are the banks...really?

The best analysis that I read recently on that subject is

Martin Hutchinson says that possibly TWO big banks in USA are “technically” insolvent Citigroup and Bank of America.

According to him, some are OK; the majority, are walking wounded that with a bit of tender loving care could possibly recover.

Imposing an artificial "market" on any of those banks is about as smart as pulling a gun in a crowd on the verge of panicking, and starting to shoot people at random.

Everyone who knows, knows that many of those Toxic Assets will come good

OK not back to face value and BBB are all toast anyway.

The reason that we got in this mess is that for a long time people believed that assets that in reality had no substantial or sustainable value, had great value.

Like a tin of sardines with a tiny hole that you don't notice, then a hundred miles into the wilderness, you open it up and find everything is rotten. And Murphy's Law says it was the last one!

Then the LTV went down, the rating agencies noticed, ran their models and said, "This is bad". Then there was FEAR, everyone panicked, and no one wanted to buy tins of sardines under any circumstances, except a very few specialists who really knew what they were doing like Loan Star who wait for it, did it mainly on credit from the buyer!!

The value that counts is what those assets will be worth when the fear goes away. That's hard to work out, but the alternative is not getting a panicking crowd to mark-to-market.

We have lived with rotten sardines in the picnic box for five years; another year won't hurt, what needs to happen is the tedious task of separating the good from the half-good, from the bad. Sadly there is no "quick-fix" for that, and if you want to decide which banks to nationalize and which to leave alone, and you want to do it QUICKLY ((which some say is imperative), all you can do is eyeball (

And then set up some more stringent quality control procedures for the "O-rings" on those tins of sardines, so we can start to think of lift-off again, in anticipation of Columbia . Although like the man said, there is no desperate hurry to buy a brand new fire-truck, before there is any chance of a fire.

Unless someone is going to go out and deliberately set some more?

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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