Thursday, February 5, 2009

What are the "clogs" in the flow of the Credit Markets

Many people have pointed fingers at the parties responsible for the credit crunch - Wall St., Main St. Banks, consumers, and so on. Truth be told, there's enough blame to go around. One of the largest contributing factors affecting loans on the books is an obscure accounting rule, called "mark to market". This rule is intended for tightly traded securities, ones for which there is not a large trading market. The "toxic assets", hodge-podge of both "good" and "bad" loans, fall into this category. Once one group of collateralized debt obligations gets "written down", others banks with similar assets also need to write down tose assets. A domino effect of write downs ensues. There has been no end in sight.

Washington, including President Obama's office, The Treasury Department, and the SEC, to name a few, are considering suspending the mark-to-market rules. Some speculate that the new financial system rescue package will create a "bad bank" that the government will house, and that this rule change may prop up the assets of this bank, with the intent of halting the downward spiral in book valuations.

Will this work? I do not know. But one thing is for certain: if we do nothing we will fail. I think this forward-thinking from the governmnet will eventually lead to normalizing the credit markets.

Wall Street certainly thinks so.