Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 2/9) 

Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s SHEconomics. 

Thank heavens it’s Friday. All week I’ve heard people wishing each other a happy weekend – starting about Tuesday! The nation is so weary, and so ready for some good news.

Treasury Secretary Tim Geithner surely didn’t give us any. Perhaps hopes were unrealistically high that Geithner could actually solve the banking system’s woes. Still, since the rollout of the new Financial Stability Plan was highlighted several times during President Obama’s first press conference, and since it was delayed several days, investors were expecting more.

Here’s the problem. The country’s banks are still sitting on hundreds of billions of mortgage-related assets for which there are no buyers. A 2007 accounting standard — FAS 157, the so-called “fair value” or “mark to market” rule — requires the banks to carry these assets at market value, rather than at cost. How do you determine market value when there is no buyer?

Morgan Stanley and Goldman Sachs are said to have marked their mortgage-related securities down to 25 cents on the dollar. That’s probably an overly cautious valuation. It’s pretty clear that some other banks have not taken as conservative an approach, and so may face further write-offs. With each charge-off, the banks have to scurry around to bolster their capital ratios, to meet government standards. Their ability to lend depends on their underlying capital; consequently, banks are nervous about expanding their loan portfolios.

One of the rumors circulating last week was that the government would suspend FAS 157 to give the banks some breathing room.  The rationale for this suggestion (which has been widely endorsed) is that at critical times the market price may be misleading. For instance, Vince Farrell of Soleil Securities Research reports that a firm called Vernon Capital recently reviewed $1.4 trillion of Alt-A mortgages. Some $948 billion of these loans are current, in terms of interest and principal payments being up to date. Notwithstanding this, the loans are marked at 50 cents on the dollar. Why? Because a distressed financial institution dumped a portfolio of such loans to avoid failure, and that sale set the price. Normally, these assets would be carried at par.

I think that suspending mark-to-market is a good idea. Those opposing the move say that investors would lose confidence in the balance sheets of the banks. What confidence? Citigroup and Bank of America are selling at single-digit prices; I don’t think you can paint a darker picture.

Geithner probably chose not to follow this route because the administration is heeding the populist anger over handouts to banks and bankers. One of the shortcomings of his plan was its relatively small size. Though he talked in trillions, a good part of that presumed flow comes from the private sector. For his part, he seems reluctant to ask Congress for more than the $190 billion of the $350 billion in remaining TARP funds to shore up bank capital. That will not be adequate, which then leads to the notion that the “stress test” of banks — which was also proposed — will indeed lead to greater government ownership of these companies.

Geithner’s proposal was also criticized because it won’t be implemented for weeks, if not months. While our new president   has been talking immoderately of emergency and catastrophe in order to ram the stimulus bill through Congress, he apparently didn’t impress Geithner with that same sense of urgency.