The Paulson Plan: Investor Implications

We have been writing a series of articles for RealMoney on the Paulson plan and Congressional reactions.  The editors have graciously moved some of these to the public site so that we might reach a wider audience in a timely fashion.

Mark-to-Market Accounting

One article reviews the emerging recognition of FAS 157 as a contributing source of credit problems.  This will be a familiar theme for regular readers of "A Dash."

Please note that we say "contributing source."  One of our favorite readers suggested that we are "talking down" to the unsophisticated.  It is a peril of trying to explain something that goes against the grain for most.  It is much easier and more popular to inflame opinion by playing to people's existing biases.

All of the critics of FAS 157 want to achieve accurate measures of assets.  We have stated this many times.  Despite our careful explanations, those taking the other side of this debate say something like, "accounting rules do not cause credit problems."

Well of course not. And none of the many critics allege this.  Those writing on this topic embrace a more complex causal model, where several factors contribute to a problem.  Check out this article for more insight.  Any reader or investor is free to choose a simplistic bivariate model and stick to it.  We merely suggest that there are many factors, and FAS 157 is an important element.

Briefly put, anyone is free to choose his/her own level of sophistication and invest accordingly.

Since the article appeared, there has been another round of strong voices on this issue.  Too bad that they were not so vocal back when it would have made a difference, at the time we were first pointing this out.  We shall try to catch up with the recent strong comments, including today's Bernanke testimony, in a future article.

The Oversight Issue

In a second article we argue that Congress is loath to relinquish its traditional oversight role.  We wrote the article before today's hearings, and the result was not a surprise for our readers.  Our expectation is that the final legislation will have some broad authorization for a plan, but limited initial appropriations.

Congress wants to maintain some control, and appropriations are the only realistic method of doing this.

How to Invest?

Will the market accept a plan with an initial limitation?  Paulson says "no."  The Democrats will try hard to satisfy the need for market reassurance while retaining ultimate control.  No one can predict the reaction with certainty.

While we are trying to share the main conclusions with our readers, we encourage those interested to read the entire articles on site.

You may also like


  • Lee September 24, 2008  

    “Trying to solve all of the problems on a short deadline is a challenge. FDR’s speech after Pearl Harbor comes to mind.”
    FDR’s speech closing banks and confiscating gold comes to mind. How did that work out? Seems like we were stuck in depression until we transitioned to war.

  • RB September 24, 2008  

    Briefly put, I was objecting to my (perceived) understanding of your statement that those who think taxpayers will lose money are wrong. My concern was whether Bernanke/Paulson know what the correct price should be — and therefore, I highlighted the critiques of two sources who argued for an equity stake so as to minimize the chance of taxpayer loss. If its based on an optimistic view of housing prices going forward, that is uncomfortable given Bernanke’s optimistic public views about housing and the economy prior to the Bear Stearns episode.
    Based on Paulson’s statements yesterday, the Paulson plan seems to have been a negotiating ploy, particularly with reference to oversight.
    Given an industry which goes into crisis mode so often, I wonder why their regulations are loosened ever at all — count me among those with a similar gut feeling as those described below. Sure, we want to avoid a repeat of the Depression and all that ..

    So a taxpayer bailout is inevitable?
    I think it’s inevitable. In Japan, in the end, authorities had to do that. There was very strong resistance here as well, both from [parliament] and the general public. The American situation is very similar: There will be resistance from Congress and from the American people, because people, whether in Japan or the United States, simply don’t like the banks. They are the institution that lends you an umbrella when the weather’s fine, and won’t lend it to you when it’s raining. But eventually we had to overcome that.

  • kp September 25, 2008  

    Influencing behavior all comes down to figuring out which way to put things. You have made two points:
    1. FAS 157 / mark-to-market needs to be suspended
    2. When international accounting standards are adopted, the toxic parts of FAS 157 will no longer exist
    Since no one is listening to #1, you should simply say “We need to adopt IASB standards immediately, for the sake of desperately needed global coordination, and this crisis will end.”

  • Jeff Miller September 26, 2008  

    KP – -Are you in marketing? Clever idea.

  • kp September 27, 2008  

    That too. I own my own business.

  • RB September 28, 2008  

    Yes, yes, we need some trickery because of all those models of probity surrounding us. Just like those Congressmen who lie about CPI because they are so fiscally concerned.

  • Jeff September 28, 2008  

    RB — Let’s try to keep the threads separate. We have a sharp disagreement on the measurement of CPI. I will revisit the world of the cynic versus the government.
    Meanwhile, we are all trying to figure out how to make some investment returns from what is happening.
    My contention, now supported by many astute observers, is that we have a self-inflicted death spiral. I ask you to do the following.
    Check out those who have opined on this topic. Try to separate bloggers, pseudo-economists, journalists seeking a headline, and academic economists from those who actually trade the markets. I already know the result of this comparison.
    Of course it depends upon a willingness to seek expertise instead of starting with the idea that you already know the answer. You have written enough here that I am confident in your ability to meet this challenge!
    Make your bet.
    Just a thought….

  • RB September 28, 2008  

    Forgive my earlier poor attempt at sarcasm regarding the need to obfuscate. I do not have any expertise on FAS 157, nor do I repudiate the expertise on the subject.

  • Jeff Miller September 28, 2008  

    RB — Sorry to be clueless in reading this. I am trying pretty hard to get people to see a complex issue.
    It is so easy to criticize and so hard to do anything constructive on the issue.
    Any advice you have is most welcome!

  • RB September 28, 2008  

    Apparently your Gunning-Fogg index is high.
    Just kidding — I actually think you write very well. I ran some of my sample writings through some online fog index calculators and mine come out quite high too.