Newt Gingrich on Paulson and Mark-to-Market-Accounting

Many of us know that the proposed Paulson-driven “bailout plan” is inherently wrong. Having said that, if this plan is wrong, then what plan is right?

Newt Gingrich has been all over the talk shows, and online, declaring that most of the problem can be fixed by suspending Mark-to-Market Accounting. On Greta Van Susteren’s On the Record tonight, Newt said suspending Mark-to-Market tomorrow, before the stock market opens, would greatly calm the current market plunge.

So what is Mark-to-Market Accounting? Here’s Newt’s explanation in a ForbesOnline article dated September 29, 2008:

“Mark-to-Market” Accounting and the Origins of the Financial Crisis: Mark-to-market accounting (also known as “fair value” accounting) means that companies must value the assets on their balance sheets based on the latest market indicators of the price that those assets could be sold for immediately. Under such a rule, declining housing prices don’t just reduce the value of defaulting mortgages. They reduce the value of all mortgages and all mortgage-related securities because the housing collateral protecting them is worth less.

Okay, I get that.

Here is some commentary by First Trust economists, Brian S. Wesbury and Robert Stein, linked in Newt’s Forbes piece (pdf files):

…it seems clear that much of the current crisis has been exacerbated by mark-to-market accounting, which has created massive, and unnecessary, losses for financial firms. These losses, caused because the current price of many illiquid securities are well below the true hold-to-maturity value, could have been avoided. The current crisis is actually smaller than the 1980’s and 1990’s bank and savings and loan crisis, but is being made dramatically worse by the current accounting rules.

Some current stats and reality-thinking on subprimes:

The vast majority of mortgages are still paying on time. In fact, roughly 75% of subprime mortgages are current. …

We must remember that behind every mortgage is a house, and even if 100% of subprime mortgages were foreclosed on, these bonds would still be worth at least 40 cents on the dollar. As a result, everyone knows that mark-to-market prices of less than this are not realistic. Yet, the accounting rules we have today are forcing companies to price to these insanely low prices. It is true that the root of this crisis is bad mortgage loans, but probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market.

The First Trust Economic Commentary, dated September 25, 2008, ponders how the rest of the world would view a “change of accounting rules,” in the midst of a crisis:

Relaxing mark-to-market rules temporarily in the US, let’s say 3 years, for troubled assets issued between 2003 and 2007, will not undermine our standing in the world […”many foreign countries do not have mark-to-market accounting rules…]. In addition, the proposal of a $700 billion bailout fund, combined with the government takeover of Fannie Mae, Freddie Mac and AIG, has already undermined foreign confidence. Just look at the dollar. It has plummeted in recent days. and listen to what foreigners are saying about capitalism, which is now under more fire than it has seen since the 1970’s.

According to First Trust, one of the arguments FOR the bailout is that public money must be used because the problem is so severe that “…private money can’t or won’t.”

This argument is interesting. Where do those who make this point think public money comes from? it doesn’t grow on trees; it comes from the private sector.

And then this salient point is made:

In fact, if the Treasure makes a profit on its plan….these profits will be made at the expense of the US financial sector. In other words, any profit made by the new government investment fund is just indirect taxes. They are profits that could have accrued to the private sector.

Today, I’ve been hearing that, had this Bailout Bill passed the House today, Secretary Paulson would be given complete and total authority to buy the assets from failing companies at whatever price he deemed appropriate. Then I found this Newt-quote at NPR Online:

I was just reading an analysis by a very sophisticated person who said that there’s been at least one leak from a congressional staff briefing by Secretary Paulson, in which he clearly indicated he intended to buy assets at above their market value.

As an aside, you may have noticed that EVERY time Gingrich mentions Secretary Paulson, he refers to Paulson’s previous employment at Goldman Sachs, where Paulson eventually succeeded John Corzine as Chief Executive. His net worth is thought to be over $700 Million. Newt tells NPR the following:

…after all, last year, at Goldman Sachs alone had three people each earning $73 million a year. Now, why should we bail them out?

The text of the failed Bill.