Our view :
Even as last ditch attempts are being made to prop up the market sentiments by creating an artificial euphoria of all is well, the Banks, the Federal Reserve and the Treasury realise everyday that it is becoming increasingly more and more difficult to regain the market trust that is required to commence normal trading and business. Credit is known as the oil of the economic engine, and credit ultimately is the result of creation of confidence. Until all players are confident about the intentions and strength of the others, there can be only a cat and mouse game of who commits first . This leads to delay, stagnation and loss of opportunities for business. That can only prolong the depression, not end it.
Not so long ago Chinese President Hu Jintao the biggest external lender cum investor of US Treasury Bonds aired concerns after the Fed decided to print $ 1 Trillion paper money for enhancing liquidity for financing of the mortgage based toxic securities TARP (Toxic Assets Relief Program) . Now Charles Bowsher the Chairman of the Federal Home Loan Bank system’s Office of Finance resigned citing inability to sign the audit report as he did not agree with the standards and processes for valuing the mortgage-backed securities.
The 77 year old, Bowsher an extremely respected figure in the Banking Circles headed the the Office of Finance since 2007, that issues and services all the debt for the 12 regional Federal Home Loan Banks, that currently amounts to $ 1.26 Tr. It is the largest U.S. borrower after the federal government, at the head of the pipeline that ensures low cost loans to be distributed to the people through over 8000 member Banks and financial Institutions. The bone of contention was none other than the valuation of the toxic mortgages held by the FHL regional Banks, which in some cases were shown in their books to be much higher than even the securities actually held by the Banks. In short the mortgage values were being manipulated and Bowsher an ex- Comptroller General declined to sign on the audit committee report that would certify such a financial statement.
The big question is therefore a lack of trust in the valuation of these toxic mortgages and the attempt to repackage and sell them at the original book value, and in some case even higher. Let us assume the best case scenario, that given the massive treasury support, the Banks are able to dispose their toxic assets to certain buyers at the higher price. The questions that follow are.
· Who will be the buyers? The American people or front men & dealers of the Banks doing a mutual swap.
· What shall these buyers do with the mortgages unless they are able to resell it? How will they recover the investment with profits?
· What would be the resale price for the second sale without TARP financing?
· If market based pricing and normal trading confidence in the resellers market cannot be restored for the Toxic assets, why then spend $ 1 Trillion of the taxpayer’s money to just swap it around?
In this blog from “ecology to economy” we deal with discussing sustainable practices which includes sustainable valuation, profits and market prices.
We could be wrong. Tell us if we are & why? We encourage diverse opinion even if it is from commercially interested groups opposed to our thinking
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