Until the concepts of derivatives emerged, there were only 2 times when the worth of something meant something:
- When you buy it
- When you sell it
Which brings us to the concepts of Mark-to Market (What is the price if you sold it TODAY) vs. Mark-to-Model (What is the guesstimated worth if you sold it at some point in the future?)
Now to Geithner's argument:
You can listen to Geithner's interview with Adam Davidson at Planet Money.
As Baseline Scenario points out
- Around the 14:30 mark, in response to a question about the problem of valuing bank assets, Geither said this:
If somebody asks you, “what’s your home worth today?,” your answer to that question would be dependent on whether you had to sell it today, or you were planning to sell it in three years . . . or you were planning to sell it in ten years . . . So that basic challenge of trying to figure out what your home is worth, or what any asset is worth, depends a lot on how long are you’re going to hold it, and it depends a lot on whether there’s going to be financing available to people out there who might buy it. And in the absence of financing, if you had to sell it today, it would be worth a fraction of its basic value. Now, what’s happening in our market today is that we have just a broad shortage of financing available. And what the government needs to do in that context . . . is to try to make sure that the government and the central bank together can provide the financing to help get those markets working. And that will make it more likely that these assets are worth and will have the value that is their basic inherent economic value rather than an artificially depressed value that reflects the absence of financing and credit.
Geithner is in essence saying that mark-to-market is unfair because the properties will be worth more at some point in the future. Which may be true except this is not going to occur in the near future.
Evidence of declining home values is everywhere:
The Financial Times
Daily Markets
Milwaukee Business Journal
So to what hypothetical date is Geithner pegging these prices? Well, that's a bit vague.
The decline in the value of real estate triggers the decline in bank assets (both true assets and the values of the CDO's) which in turn means the bank needs more capital to meet the Fractional Reserve. The other factor is that homeowners realize how much they are underwater and walk away, the defaults are realized - not only feeding back into the downward spiral, but also triggering Credit Default Swaps.
But Geithner wants us to "pretend" that the assets are worth more than they actually are.
I understand that Sec. Geithner faces complex geo-political problems. Least of all is the sovereign wealth invested in the top banks. The foreign investors may be less willing to buy up treasuries if their investments in Citi, BofA, GS, and JP morgan are wiped out. Case in point.
Also, there are complex logistical problems in taking over (ahem, restructuring) Citi or BofA in that no other banks are large enough to absorb them. Do we even know if the FDIC has the manpower and funds to guarantee the deposits?
So, I do understand that this is a complex situation. However, as long as the original logic is incorrect, Sec. Geithner is not going to have a workable solution.
The trickling IV to the banks is not working and the taxpayers are losing more and more with each useless injection.
Another, ironic twist - guess what is increasing - Credit Default Swaps on the U.S. Treasury