I would first off like to thank Dan Koestner for bringing this article to my attention. Interesting perspective and solution that does not involve a bail out. I have a link to the actual article. But I have put a summary of his proposed solution.
-Pablo
Gingrich on Bailout Bust: 'I Don't See How the President Can Avoid Firing Secretary of Treasury'
http://www.foxnews.com/story/0,2933,430429,00.htmlLink to the videoTuesday , September 30, 2008
"....
VAN SUSTEREN: Is Secretary Paulson the right guy to be spearheading this?
GINGRICH: No. I mean, I think that he must have been a terrific deal-maker at Goldman Sachs and a great chairman of Goldman Sachs, but I don't think that's the same job as being a secretary of the Treasury. And I think the president would be much better off if Undersecretary Kimmet was now replacing Secretary Paulson. The administration won't like to hear that, but I think it's true.
One reason is that there's a step they could take tomorrow morning that would dramatically improve things with no congressional action, and that is to change the accounting rules that the Sarbanes-Oxley bill imposed on the system called "mark to market." It's a complicated issue, but I think it's so central to our future, Greta, that every American needs to understand. We adopted an artificial rule which drives down the price of everything in a period when prices are declining. So we artificially make it much worse for companies.
Both Chairman Bernanke and Secretary Paulson have indirectly admitted this when they said that they would pay two or three times the market value for paper because the paper is so dramatically undervalued. Now, that's a sign that it's the core accounting system that's wrong.
Two Chicago economists indicated on Thursday they thought this was 70 percent of the problem. That's $500 billion of the $700 billion that Paulson wants. The European central bank warned in 2004 that this would be a disaster, that you cannot do what we tried to do under Sarbanes-Oxley.
So my challenge to the administration is simple. Suspend tomorrow morning the mark-to-market requirement. Replace it temporarily with a three-year rolling average. You will overnight explode the amount of liquidity on the street. Companies will immediately have relief all across America. It will be a stunning effect. And you will have bought plenty of time to now think through in a better way what was so badly designed by Secretary Paulson and that, frankly, could not be salvaged.
VAN SUSTEREN: All right. If this is so simple -- and Secretary Paulson is a man certainly with a long history in the financial system, having been at Goldman Sachs -- if this is so easy to change to this three- year rolling average, which you say will introduce liquidity into the system so quickly, why isn't he doing this? I mean, he doesn't -- he seems like a guy who would know this stuff.
GINGRICH: Well, I think there are at least two major reasons. The first is that Chairman Cox of the Securities and Exchange Commission sees his job as implementing the rigidity of Sarbanes-Oxley, and so he's doing what the Congress said during the last crisis. The fact that it's making it clearly and demonstrably worse doesn't seem to be getting through to him.
In the case of Secretary Paulson, I honestly believe -- and this is obviously grounds for real debate. But my personal belief is that he liked the idea, as a former chairman of Goldman Sachs, that he would get to spend $700 billion and he wanted the power.
Let me give you a single example. They could have come in and asked for a loan authority. They could have said, We will loan money at Treasury plus 2 percent to any firm that has a liquidity problem, but the firm has to work it out and it can't be a bailout. He didn't take that route. He was asked by House Republicans over and over again. He wouldn't take that route. He wanted the authority to go up and buy these assets -- and by the way, to buy them at prices that he arbitrarily set based on his judgment, not at market value.
And so I think that part of this is, if you will, a kind of hubris that was centralizing so much power in the Secretary of the Treasury that I think was very unhealthy for the American system. I was delighted when Senator McCain intervened the other day, and with his help, Congressman Boehner and the House Republicans significantly improved what was a very bad bill. And my fear now is that Speaker Pelosi will move to the left and make the bill dramatically worse by Thursday or Friday.
....GINGRICH: Every time I turn around, somebody says to me, "Let me tell you my horror story." Let me tell you how bad mark to market is because what it does is, it says to a firm, if you have one bad sale, you remark your inventory based on this new market, and that drives your inventory down. And now you've got to go out and borrow the extra money to cover this change in your values. On an upward cycle, it would lead you to overvalue your property. On a downward cycle, it leads you to undervalue your property.
And all you have to -- don't take my word for it. Read the testimony of Bernanke and of Paulson, who both said -- the chairman of the Federal Reserve and the secretary of the Treasury, who both said under oath that they would pay two or three times the current market value because the paper is actually worth dramatically more than its current value.
Now, that tells me what we have here is an accounting problem, which is leading to a liquidity problem. And as a simple test, I would challenge -- Chris Cox is an old friend of mine. I would challenge him tomorrow morning, take the gamble. Suspend it for two weeks and see what happens. If it works beautifully if the markets reliquidify, if we suddenly have dramatically less of a problem, then don't reimpose it. but if it turns out to be a problem, two weeks later, you have the authority to put it back in.
But take the gamble of helping America tomorrow. Don't cut a deal that moves the country into even more corruption and even more big government. You know, the Democrats at one point in this negotiation had a proposal to give left-wing community groups $20 billion as part of the price for passing this. I can't imagine what they're going to try to charge on Thursday.
...the first thing they ought to do tomorrow morning is suspend mark to market, which the administration can do internally without any bill. The second thing they should do is rewrite the bill.
But I would rewrite it to move it towards being a lending authority, not a purchasing authority and to enabling people to have a work-out, not a bailout..."
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