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.
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.