Deadman's picture

    A better bailout ... or just a bigger, badder one??

    So now the Senate is going to try its hand at passing a bailout plan. I'd make a prediction that the bill will almost certainly be passed by both chambers of Congress, but I apparently am a lot better at sports and market predictions than political ones.

    The Senate bill seems extremely similar to the one rejected by the House earlier this week, save for a few sweeteners thrown in to try and mollify the politicians who thought the the original plan either did too much to blow up the deficit and prevent the market from self-cleansing (Republicans) or not enough to help lower- or middle-class Americans (Democrats).

    Unfortunately, most of these 'sweeteners' really aren't so sweet. Instead of exemplifying the wonderful compromises that can be created when a messy political system works its gridlocked magic, many of these proposed changes are just more sour examples of a broken Washington that encourages myopic legislation.

    For instance, let's take a look at perhaps the most controversial addition to the bill: Modification of the current mark-to-market accounting policies now in place that force banks to price their assets at current market levels.

    This is a complicated issue, but mark-to-market basically forced banks to take huge writedowns on the mortgage-backed securities that are at the core of the current crisis and still mostly rotting away on balance sheets throughout the system.

    Critics say the mark-to-market rule has a couple of main problems: 1) Banks which are forced to take writedowns must raise more capital and curb lending to satisfy reserve requirements or face insolvency, which only helps contribute to the spiraling meltdown 2) Mark-to-market leads to inaccurate or unnecessarily overstated writedowns, since in many cases the market for these mortgage securities is non-existent or in a state of unusual distress.

    These critics say that if mark-to-market stands while the bailout plan is implemented, banks will be less likely to sell their bad assets to the government at low prices because that will mean they will have to book huge losses on the rest of their balance sheets. These critics instead want these assets to be valued by bank regulators ... the same regulators who had little to no idea of the problems being created by the housing bubble.

    In my opinion, getting rid of mark-to-market would be a big mistake. Marking to market ensures that banks take their lumps and move expeditiously to shore up their balance sheets. Japan's decade-long retrenchment has lasted as long as it has partly because banks refused to face up to current realities. A report from a Credit Suisse analyst put it best: "Which information is more relevant, what you paid for an asset in the past or what it's worth right now?"

    This may be one of the worst changes, but almost all of the other 'sweeteners' in the Senate version of the bill will raise the total cost of the plan while producing, at best, unclear benefits. I fear that the cost of this bailout package will soar past initial estimates, and younger generations will be paying for this mess for decades to come.

    Among the other changes being discussed in the Senate bill:

    • Temporarily raising FDIC insurance to $250,000 per account. This is a mostly cosmetic move designed to bolster people's confidence in banks and keep them from moving funds out of the system, esp. with regards to smaller institutions. Alas, if a lot of banks go under, the FDIC won't be able to afford the increased coverage and will have to borrow more from the Treasury. Ugh.
    • Relief from the alternative minimum tax, or the AMT. Call me biased, but this is a good idea. The AMT has gone far beyond what it was originally intended to do, which was to make sure that very rich folks do not use deductions to avoid paying their fair share of taxes. Because it hasn't been indexed to inflation, the AMT now affects millions of middle-class Americans, including yours truly. But whether AMT reform makes sense or not, relief won't come without a price (and stop me if you've heard this one before): An even bigger deficit.
    • The creation or extension of a slew of tax breaks, including an R&D credit for businesses, and local and state tax deductions for individuals. Some of these deductions do encourage desirable behavior, such as the purchase of solar panels, but I'm sure some of them will end up being as stupid as our ethanol subsidies, and all of them will come with a cost.
    • A mental healthy parity law, which requires certain health insurance companies to provide the same coverage for mental illness and addiction as they do for physical illness. OK, this may be a fine and worthwhile legislative initiative, but it has absolutely no place being added to a bailout plan.

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