Wednesday, March 25, 2009


I'm a little upset by all of the bailout programs coming out of Washington. I can't keep track anymore. There is the TARP and the TALF, the two stimulus packages, numerous bailouts for banks, Bear and AIG, and the purchasing of Treasuries by the Fed. A trillion here, a trillion there... Some place total spending estimates now at $8.5 trillion! Here is one count by The Centre for Research on Globalization.

Now, I have said before that I like these programs. I think this is what the government should be doing. However, I do not believe that this problem is one that we can just throw money at. These toxic assets are considered toxic for a reason. Most were created by physicists and mathematicians to be very complex, dynamic securities with many complexities that make valuing them very difficult. They used a mix of dynamic traunching and derivatives like swaps to hedge away risks in the loan portfolios. (Which only work when the counter parties are solvent!) This article gives a good idea of the complexity of these instruments. Valuing these toxic assets continues to be an issue, as it was with the first bailout, when members of Congress grilled Ben Bernanke on how the government could value these assests better than the market can.

I believe that this issue is at the core of the credit crisis. Any plan to fix the credit crisis without dealing with this problem is a waste of time and money. Some of these structured products are so complex that I believe the only solution is to purchase them back from their holders, restructure them, and return them to the owner. This process will remove the complexities of the securities so that individuals can see what they are, rate them accordingly, and value them properly.

What I'm suggesting is no easy task. But this must be done to obtain clarity on what loans underlie these complex securities. Only after we have clarity on these loans can we then move to discussions on mark to market accounting and the like. For more details on exactly what I'm talking about, I recommend this book