Bail out, Investment or Moot Point?

This afternoon the House of Representatives has finally passed it’s version of the finance bill which has been commonly referred to as a “bail out” bill committing the American taxpayers to $700 billion in financial guarantees for commercial and investment banking firms trading on Wall Street.

My personal view of the bill is that it wasn’t necessarily a bail out for Wall Street firms and wasn’t and isn’t going to cost $700 billion. Even though commercial and investment banking firms found themselves holding mortgage derivatives or paper which they couldn’t sell leaving the assets with values impossible to determine by current accounting practices enforced by the SEC, I never felt that the assets were “worthless” as Ron Paul and others have stated previously. They would only be worthless if the mortgages were written for property that didn’t exist.

As I mentioned in a previous article, Was John McCain Right About Wanting to Fire SEC Chairman Cox? « Earl says … on 9/24/2008, the commercial and investment banks have been hamstrung by an accounting rule imposed by the SEC which was forcing them to value assets at fire sale prices which, in a rapidly downward spiraling market, made it virtually impossible to determine portfolio values according to those accounting rules.

Unfortunately, this could have been prevented by SEC chairman, Chris Cox, since he had the authority to amend the rules at his own discretion … but didn’t. This was only one of the many blunders committed by the SEC under his chairmanship as pointed out by an Inspector General’s report earlier this week.

Even though the Senate voted on this rule change earlier this week, it was only a reaffirmation of the regulatory power that the SEC chairman already had as noted in the following article by the Wall Street Journal, Momentum Gathers to Ease Mark-to-Market Accounting Rule –, where the authors noted that

” …A proposal contained in the revised financial-rescue bill the Senate considered Wednesday reaffirms the Securities and Exchange Commission’s existing authority to suspend “mark-to-market” accounting.”

And the British publication, The Telegraph, noted in its article,Financial crisis: SEC cheers finance companies with mark-to-market ruling – Telegraph:

The Securities and Exchange Commission brought some much needed cheer to the US financial sector after issuing accounting guidelines that could help curb the billions of dollars of writedowns reported by the country’s leading banks.

It seems that it is entirely possible that much if not all of the financial turmoil which has occurred over the past 11 months might have been avoided with some insightful judgement and knowledgeable action.

If changing the accounting rules are a good idea now, why shouldn’t it have been a good idea 11 months ago?

It seems that a lot of awfully smart people might have missed the boat on this one.

How does this effect the $700 billion “bail out”? Was it necessary?

My opinion is that it was necessary to restore some level of confidence in the market. I doubt that most people would have bought the notion that a simple change in an accounting rule would have saved the day many months ago and would only believe that some draconian measure by the government would suffice.

Now the government will buy some property which will have some added value in the future which should turn a profit for the taxpayer. That is, unless some Congressmen don’t take the money and throw it away somewhere else. And, I doubt that very much of the $700 billion will actually have to be used. It should simply be considered as a line of credit to make purchases and not a full blown loan which is already gone out the door.

Since Wells Fargo and Citigroup are now actively haggling over Wachovia, there is an indication that all is not lost and there are some good buys in all of this mess.

So, is the “bail out” actually a moot point?

From a psychological standpoint … no. From a practical standpoint … maybe.


One Response

  1. […] issue was first addressed in this blog in the articles, Bail out, Investment or Moot Point? and Was John McCain Right About Wanting to Fire SEC Chairman Cox? « Earl says […]

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