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This (from John Mauldin's Outside the Box) would
seem to be the key deficiency in the Paulson Plan. Don't see how this can be fixed in
the short run.
There is one practical problem that will
plague the
Paulson Plan and any plan that involves the government purchasing
distressed assets from financial institutions. These assets are NOT(!!!)
accurately valued on the books of financial institutions.5
Accordingly, these institutions are not in a position to sell them to
the government at current fair market value. Any sales at current
market value would inflict huge losses on these institutions. The
alternative is for the government to grossly overpay for these assets,
which would constitute a disguised capital infusion into these firms
that would short-change the American taxpayer. This flaw in the plan is
why members of Congress from both sides of the aisle insisted on some
kind of profit-sharing structure that would compensate taxpayers in the
event the government pays above-market prices for assets. HCM
fears that very little of the $700 billion is going to be spent in the
near future because of the reluctance of banks to part with assets at
anywhere near their current value, and the government's reluctance to
overpay for these assets.
5 Although in fairness all the blame for this
can't
be placed on these institutions. There is currently no market for many
of these assets and placing a value on them would be an arbitrary
exercise. This is why mark-to-market accounting should be suspended for
an indefinite period of time.
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