Posted by
James Burns on Tuesday, September 30, 2008 8:28:36 AM
Another culprit in this great economic crisis that we are in is called
the Sarbanes-Oxley act. This legislation was passed in 2002 and acts
like a two edged sword as far as accounting goes. This is the
legislation that put into effect the mark to market rule on mortgage
backed securities.
What this act does is when an institution wants to sell off mortgages
the whole institutions inventory is valued by their last sale. So what
does this mean? Well when the economy was booming mortgages were
repackaged and sold in groups as mortgage bonds. Investment banks
bought these bonds and turned a profit by collecting the interest. Well
when valuing these instruments an institution would have to take, under
federal law, and value everything in inventory based on its last sale.
So this is good when values are high. But as we are finding out that it
also works in reverse. When banks start selling these mortgages off
when values are low; again they take the lowest price and revalue their
inventory again. So even loans that are good their value drops because
of the mark to market rule. So this in turn lowers an institutions net
value, which inhibits it from making and receiving loans. It basically
devalues a banks assets based on instant market fluctuations.
So an easy fix for this, the SEC Chairman has the power to suspend this
practice and go back to conventional accounting rules. This would
automatically raise the value of all these assets these institutions
have and then increase their capitol by giving the assets some
liquidity. I have heard reports that 500 billion of the 700 billion
needed for a bailout could come from this, and the rest from an FDIC
type insurance company run by the feds, paid for by Wall Street. This
is what house republicans want to do. So why won't the SEC do this?
Well I think it has to do with Hank Paulson. Mr. Paulson is the
Secretary of the Treasury and former CEO of Goldman Sachs. One of the
firms involved with this bailout. In the bailout Paulson has
discretion on what assets the government buys and at what price. So if
the market value is low on an asset, he can pay a higher price knowing
the true value of that asset. But if its the right asset, meaning an
old Goldman Sachs asset, he can make money because I am sure he owns
options in Goldman-Sachs or some of the assets. So I think something is
fishy here. But I cannot be sure of it, justs sounds odd to me.