The big banks and others (read: state and teacher pension plans?) who are holding the bag with mortgage-based Collateralized Debt Obligations (CDOs) whose values have dropped sharply are sweating bullets.
The last thing in the world they want to do is 'mark to market' and put these things out for their real value -- fearing there would be no takers.
So, what to do?
The Treasury has led a scramble in the past few days to put together a pool of funds (see NY Times here, and Wall Street Journal here) to buy these troubled assets in exchange for new short term debt.
Will the pool -- which is not expected to come online for 90 days or so -- work, luring investors back to the credit markets?
It's a big gamble. A hundred billion dollars may turn out to be chump change.
Meanwhile, there is a further batch of ARM 'resets' in the pipeline, which can only leave the bankers with more nervous stomachs -- and they are timed to coincide with the launch of this pool of funds. And that may not even be the worst news, as there are indications defaults on 2007 subprime mortgages are going to make last summer's meltdown look like a walk in the park.
The scary thing for you and me -- Joe Q. Public -- is that some of the big dogs are already saying that if this pool fails, as it might, Treasury will be expected to provide further help (read: bailout).
So, if speculators in the subprime mortgage market and their go-along ratings agencies have put us in this pickle, do you think they will stand up and take their beatings like the good capitalist risk-takers they are?
Funny how, in this most capitalist of capitalist economies, economic bad guys don't want to get punished for their economic sins, preferring instead to be rescued so they can misbehave another day.
No wonder these American hucksters are girly-boys when it comes to taking to heart the classic British economist Walter Bagehot.
N.B.: I wrote this Monday evening, before Tuesday's triple crown of NY Times stories --
Background for this post --
- "As Defaults Rise, Washington Worries"
- "Treasury Chief Aims to Steady Credit Markets"
- "3 Major Banks Offer Plan to Calm Debts in Housing"
- New York Times: "Banks to Start Fund to Protect Credit Market"
- Wall Street Journal: "Rescue Readied By Banks Is Bet To Spur Market"
- The Economist: "What would Bagehot do: Should central banks act as buyers of last resort?"
- Wikipedia: "Mark to market"
- New School University: "Walter Bagehot"
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