[Assam] Pandit's Amortization Trial Balloon: Can It Float US Out of Crisis?

[Ram Sarangapani]

To those who might be interested in this sort of thing, this seems to be a
logical solution out of the present crisis.

This from Forbes and
http://www.minyanville.com/articles/C-citigroup-market-congress-Pandit-Gutierrez/index/a/21110/from/yahoo

--Ram
___________________________________

  Pandit's Amortization Trial Balloon: Can It Float US Out of Crisis? Vinny
Catalano <http://www.minyanville.com/gazette/bios.htm?bio=112>  Feb 12, 2009
1:00 pm   [image: Pandit's Amortization Trial Balloon: Can It Float US Out
of Crisis?]
       Here's how the scheme might work.

            print <javascript:print('21110');> [image: email]
email<http://www.minyanville.com/share/email.htm?type=article&id=21110>
<http://www.addthis.com/bookmark.php>

At yesterday's congressional hearing, *Citigroup*'s
(C<http://finance.minyanville.com/minyanville?Page=QUOTE&Ticker=C>)
CEO Vikram Pandit floated what looked to me like a trial balloon that may
turn out to be the path out of the credit-induced economic crisis and, in
the process, put to bed the doomsayers' chatter about insolvent banks.

In reply to a question from Congressman Gutierrez from Illinois -- who
started off referencing a meeting the congressman and Mr. Pandit had the day
before -- Mr. Pandit, with an intriguing smile on his face, described what
sounded to me like an
amortization<http://www.minyanville.com/articles/C-citigroup-market-congress-Pandit-Gutierrez/index/a/21110/from/yahoo#>scheme
in which the mark-to-market created losses for certain assets could
be realized by the banks, not as an immediate and complete hit to the income
statement (thereby impacting the balance sheet and, therefrom, the capital
requirements of the bank), but on an amortized basis over time, which will
have the effect of limiting the preposterous losses induced by illiquid
markets and their last sale/"fair value" price.

To refresh your memory, mark-to-market is an ancient theory tied to the
belief that markets are efficient and that the last price represents the
fair value of an asset. This is an absurd view of reality and human nature -
one that should have died a long time ago but still lingers in the minds and
hearts of the free-market advocates and their closet efficient market
cohorts (who don't have quite the faith in unfettered markets as free-market
advocates do, yet still can't buy into the behavioral-science fact of
inefficient markets in illiquid assets and over short time frames).

The Pandit amortization balloon would, in effect, achieve what the
alteration and/or elimination of mark-to-market would have accomplished - a
conciliation between the last sale = fair value mark-to-market ideologues
and those grounded in the reality of the behavioral sciences. In other
words, a normalization of value that could be adjusted when markets are less
stressed.
 By surrendering their "toxic assets" to the Private/Public Investment
Bank<http://www.minyanville.com/articles/C-citigroup-market-congress-Pandit-Gutierrez/index/a/21110/from/yahoo#>(PPIB)
proposal of Secretary Geithner at an acceptable price to the buyers
(hedge funds and others who will demand to buy at the lowest possible
price), banks would not be forced to record the entire "loss" all at once,
thereby generating hits to their balance sheets, thereby incurring further
capital charges (making them "insolvent"). This results in what it's
resulted in thus far: limited lending.

While I don't know exactly what Mr. Pandit had in mind, here's how the
amortization scheme might work:



   - Bank surrenders certain "toxic assets" to the PPIB

   - Bank declares such assets as a "loss" but does not record the entire
   loss to its income statement

   - Bank writes down a portion of the "loss" immediately and schedules to
   do same over the life of the asset

   - Bank retains the ability to revalue such assets over time via a note
   from PPIB


In dollars and cents, here's how this works:


   - "Toxic assets" held on the books for $0.80 on the dollar are
   surrendered to PPIB at $0.30 on the dollar

   - PPIB (Treasury and investors) own the assets at $0.30

   - Bank lists a $0.50 off-balance
sheet<http://www.minyanville.com/articles/C-citigroup-market-congress-Pandit-Gutierrez/index/a/21110/from/yahoo#>"loss"
that is amortized at 10% per year, or $0.05 to the income statement
   (and then to the balance sheet)

   - Over time, markets become more normalized, the economy recovers and the
   "toxic assets" rise in value to $0.60, where they come due and cease to
   exist

   - Bank, which has written down the loss over several years, say $0.30
   cents in total, now realizes a $0.10 gain ($0.60 cents final value, $0.50
   amortized value still on the books, $0.10 gain)


*Investment Strategy Implications*

Mark-to-market, the disastrous decision that turned a bad recession into a
credit -- and now economic -- crisis, needs to be dealt with. Since the
forces aligned against its elimination and/or modification are too
formidable for the current and past government officials to overcome,
getting around the insane rules is the next best thing. Amortizing the
losses for illiquid assets with the prospects of capturing any price
recovery would make infinitely more sense than continuing the current regime
of efficient-market fantasy thought.

Who knows what plans are being hatched behind closed doors. Maybe the above
scenario is wishful thinking on my part. However, if this or some variation
of getting around the consequences of mark-to-market, produces anything that
approaches the above scenario, the economic crisis will clearly become a
whole lot less intense. And the global economy will benefit immensely.

Maybe that's why
stocks<http://www.minyanville.com/articles/C-citigroup-market-congress-Pandit-Gutierrez/index/a/21110/from/yahoo#>have
withstood so much recent bad news and appear to be building a solid
base for a sustainable rally.