The claim is that none of the banks which currently hold mortgage-backed securities can properly value the securities (they are opaque) so none of them can buy or sell them (they are illiquid). The idea behind the bailout is that a government agency will be created that will take a guess at a price, purchase them, then determine their actual value, make that information public, and auction them back into the market. Dafydd calls it a “reset button.”
Why can’t the financial services institutions do all that themselves? Because in the meantime the securities are valueless. That represents a serious loss and the institutions are finding out that they have far less capital than they previously thought. Some institutions are simply worth less, but they’ll live through it. Others are declaring bankruptcy or threatening the government that they will declare bankruptcy in an attempt to get a handout.
This brought a question to mind — why can’t the Bankruptcy court do this? Bankruptcy courts valuate things all the time. One of the first things you have to do in bankruptcy court is establish the value of the company, which involves valuating all the assets of the company.
Companies that file bankruptcy don’t shut down. That’s why they file bankruptcy in the first place — to keep them from having to shut down. The goal of bankruptcy is to have a newly stable company emerge from the other side of it (or be liquidated in an orderly way if that isn’t possible.) That is exactly what this bailout proposes to do. This is looking like the real purpose is to be a double-secret bankruptcy.
Here’s my bitch. Bankruptcy is the duty of the judicial, not the executive or the legislative. Bankruptcy is great in that it also establishes rights for the people that are owed by the entity in bankruptcy. I don’t see that those people are going to be involved or protected by this plan.
This started out as a naked power grab by the executive. When they realized that they couldn’t succeed alone, they decided to split the power with the legislative — at the expense of the judicial.