Geithner’s “bad bank” is a big bad idea: fix bad mark-to-market accounting instead

The Obama’s administration $1 trillion plus bank bailout plan — on top of the $800 billion stimulus that just passed the Senate — will explode the national debt and rob from future generations while doing little about the tightening of credit and valuation of toxic assets. Like the Bush administration, the Obama team balked at doing anything substantial to provide relief from the mark-to-market accounting mandates that prominent liberals and conservatives agree are spreading the credit contagion.

Despite my hopes that Treasury Secretary Geithner ‘s plan would offer a change to mark-to-market rules we can believe in, as rumored in the financial press last week, the plan turns out to be “more of the same” Bush-Paulson big spending and big government bailout. As knowledgeable observers from conservative Steve Forbes to Democrat stimulus proponent Mark Zandi agree, mark-to-market relief is essential to unclogging the arteries of the credit system. As I wrote in the Wall Street Journal last fall, it is one of the major reasons for the credit contagion despite the fact that mortgage delinquency rate are still only 6 percent.

After soaring late last week on rumors of mark-to market relief late last week (and directly attributed this rise to hopes of action on mark-to-market), the Dow fell down nearly 500 points, or 5 percent today. The markets anticipate that any government money will be weighted with the strings of overregulation and de facto nationalization.

By contrast, mark-to-market suspension or relief, which would cost taxpayers virtually nothing, would let the market value these assets with private money at what the government is now planning to pay for them. Financial institutions could buy these discounted securites at a true “market” price without worrying about a future mark-to-market paper loss eating away at their regulatory capital.

Without mark-to-market reform from the SEC and the bank regulatory agencies, the buying initiatives Secretary Geithner outlines today could actually make the problem worse. As I wrote last fall in Open Market of Paulson’s original plan to buy mortgage asset (which he abandoned in favor of buying bank stock, an equally bad idea), if the government sets the price of asset securities too low, it could spread the contagion mark-to-market losses even further. If it sets the price too high, taxpayers will lose out.

It’s not too late for the Obama adminstration to use its political capital push to reform mark-to-market rules such as Financial Accounting Standard 157 that are acting as a stranglehold on the financial system. Changing accounting rules to allow banks to price assets more rationally during a liquidity crisis would indeed be a change we could believe in.