Monday, March 23, 2009

The G-Man Plan

The Policy Review Committee of Rough Fractals is somewhat split on the state of the world (if you are not confused about what is going on in the world then you have a screw loose) but I think we can say that we basically like the Geithner plan because it is elegant and probably works and is politically more palatable and probably more workable than any other. We just think that the hedge funds and private equity firms are probably getting too good a deal - why only 3% down payments at risk? Everyone says that players need to have skin in the game - at 3% there is no skin.

I also like it because it really starts to address mark to market (not completely but a good start) and mark to market was the single dumbest stroke of bad legislation to come down the pike in a long time - only thing dumber is the AIG bonus tax.

By the way if you chart the dow you will see that it was at a high the day before mark to market became law (October 2007) and has declined ever since (until maybe now) interestingly just as mark to market is being undone.

Someone should write a book on it. Why did we enact mark to market? Who backed it, who opposed it? What were the politics and did it have the impact I think it has on the current economic mess.

Think about this - there have been very few real defaults - so how come the whole economy tanked because of AIG credit default swaps that only pay when there is an actual default? CDF's do not pay just because a mortgage is underwater - they only pay when there is a foreclosure. There have been a lot of foreclosures but nothing corresponding to the trillions of losses across the whole world.

The one thing that has caused trillions of recognized losses on balance sheets - mark to market. Because all the credit defaults have been marked to zero - because no one will buy them (that is why they are called toxic). Now they will be bought by hedge funds and private equity because the risk is only 3% on the downside and the upside is huge - unless you think every house in the country is going to default.

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