Posted by
Stefano on Saturday, March 07, 2009 11:59:49 PM
Our executive and legislative leaders continue to block reform of the "mark-to-market" rules that are devastating the balance sheets of the large banks in this country. This is a simplified explanation, but these rules force banks to write down real estate loans on their books to the value of similar loans that have been recently sold on the open market, even if these loans have never missed a payment. The resultant markdowns drive down bank reserves forcing banks to liquidate additional loans or other assets. No one wants to buy sub-prime loans right now, so banks are forced to liquidate their prime loans to raise reserves. The number of loans for sale is far greater than the demand, so even a perfectly up to date prime loan must be sold for a huge discount. Loan values and bank reserves are continuing to cascade downward. Balance sheets have become so damaged that the federal government has been supplying capital to prop up our largest banks through TARP and the Federal Reserve.
Hedge funds and other investors are buying up these prime loans from beleaguered banks for pennies on the dollar. Every sale requires another infusion of capital from the government. Who wouldn't want to buy a prime mortgage loan for 28 cents on the dollar. I'd love to buy one. What these hedge funds and other investors are doing is legal but, in fact, they are legally looting our banks and indirectly looting the US Treasury.
Lending in the mortgage market is also hampered by the fact that newly issued loans may be subject to instant markdown. Why would a bank loan out money if that action would damage the level of their reserves? They won't.
John Mauldin, a money manager and financial columnist has a column that is a must read if you want to understand this issue. Please send a copy to your Senators and Congressmen. Here is the link:
Here is another excellent explanation of mark-to-market and the policy's deliterious effects on our markets posted on the Navellier blog: