Many of you can remember Enron, WorldCom, Adelphia, and other companies had artificially put assets on the books. Because of it, the Sarbanes-Oxley law required mark-to-market accounting and prevent these companies from having loaded balance sheets.
This is all well and good except for the sub prime mortgage market. Merrill Lynch was sitting with $30 billion tied up in sub-prime loans with houses. Those houses didn't become worthless all of a sudden because those people couldn't sell their bonds. Since they couldn't sell them, they basically gave them away for 22 cents on the dollar. That doesn't mean the homes lost 78% of their value--it just means there was no market for the bonds. Nobody wants to buy sub-prime bonds because they're junk bonds.
Because of the mark-to-market accounting rule, the bonds are now unmarketable so something needs to change. If you change the mark-to-market accounting law (just for sub prime loans--and just temporarily) this will free up the market and has the potential to solve 60% of the problem and cost the taxpayers NOTHING! It's well worth a try and won't get us totally out of the woods, but will sure help.
Another idea is to make the bonds marketable again, we could extend FHA insurance to subprime mortgages but extend no loans. I am not in love with the idea of guaranteeing thse loans, but it's sure better than buying them. This could be done for less than $40 billion, a 95% savings and would immediately free up the bonds to stimulate the economy.
Why don't we hear about these ideas from our senators and representatives? Good question. So I invite you to ask them directly and see if we can fix this mess without another loan from China.
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