PR: Taken one step further, this is the government’s way of attempting a “soft landing” in terms of market valuation on those toxic assets.
We all know exactly what would happen if, simultaneously, all of the banks were forced to divulge, on a mark-to-market basis, the true (or salable, to be more precise) value of those same toxic assets. The answer is complete systemic collapse and largely due to the fact that those assets, while not valueless, would be discounted significantly, in many cases by 50 – 75%. This true, market-driven valuation would blow holes in Balance Sheets throughout the banking industry and you would see the list of FDIC troubled banks skyrocket. The word on the street is that as many as another 2,000 banks and financial institutions may bite the dust by 2012 and what Geithner and the FDIC are doing right now is controlling the crash as best they can.
So, Geithner and the FDIC play a little game with the money (and there is no fear that the FDIC will go broke, the Treasury will just continue printing money for Bair and Co. to throw at insolvent banks) and they keep the fiction alive, while Bernanke talks about “green shoots” and averting Great Depression II.
The real question now becomes how much of an impact the potential collapse in Commercial RE might have, as well as the rapidly rising default rate on those mortgages that aren’t subprime, such as Alt-A and Prime.
