John Berlau suggests that mark-to-market accounting is partly responsible for the current financial meltdown because it forced banks to write down their assets even if they really weren’t worth any less if held to maturity.
Hank Paulson and Ben Bernanke believe that another Resolution Trust Corporation, armed with a $700 billion line of credit from the U.S. taxpayer, could resolve this crisis using market principles — reverse auctions for distressed assets, most likely.
Now Hank Paulson, formerly of Goldman Sachs, knows full well that the beauty of the market is that if you see an opportunity, you can make a profit. If mortgage-backed securities are currently undervalued due to some arcane accounting rule, you can bet that Paulson and Co. are all too ready to pounce. Taxpayers, get ready to profit.
Paulson’s plan is to buy those assets at 10 cents on the dollar and use all the credibility of the U.S. Government to strong-arm the economy back into functionality. It’s very likely that a year from now the RTC will be ready to sell back those assets to the market a year from now at, say, 50 cents on the dollar, factoring in default costs.
Let’s say that the new RTC spends only $500 billion in the next few months on assets sold to them by distressed banks. The RTC reaps a cool $2.5 trillion windfall in under a year. This is in addition to the enormous profits it’s already making off of Fannie, Freddie, and AIG. The Federal debt is sliced by 25% and President Obama generously extends his tax cuts to 99% of the people. Instead of FDR’s New Deal, we’ll be talking about Paulson’s Sweet Deal.
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