Saturday, October 11, 2008

Sarbanes Oxley

Sarbanes-Oxley- Well, some of it is good. Some is over reaction and bad accounting. It is so restrictive. They have to value some assets according to each day's market value. So where you have a bundle of say $100 million in mortgages, you may have to write that asset down to zero if you are in a market like right now where there are no buyers for it (because no one else has any money, because they are also writing down their balance sheets too!). Even though it is probably worth at least $70 million if not more- even if you foreclosed on every home! And the mortgages are mostly being paid on time anyway. It's a crazy and extreme accounting rule. It doesn't make companies more ethical, it just artificially causes them to write down assets that should not be. In a market like this it multiplies panic. I mean it is absurd to say those are worth zero. And the last thing you want is the US Government buying those mortgages at full value, and managing the foreclosures, and asset recapture. They're never going to run it as efficiently as the private banks would. Where is the incentive for them too??? The RTC only managed assets that had already been foreclosed on and I would hardly call it's management a shining success. The other thing is by having the US Government buy these at full value, you are not allowing the bank or investment firm to realize the loss that they should, and you are choosing winners and losers in the market unfairly. They need to realize the appropriate loss, not the US tax payers. If we do this bailout, and the government collects say 70% of the money on these mortgages, do you think that they are going to refund that collected money to the taxpayer, or spend it on more wasteful spending???

The answer is to:

1) Repeal at least half, or all of Sarbanes-Oxley, especially related to market value write downs. Make it instead an average market price over some time. This will fix about 65% of the problem and also put our US companies on a level playing field with the rest of the world. You wonder why so many companies are leaving the US! The cost of compliance with Sarbanes-Oxley is estimated at $5 Million per fortune 500 company per year, and it is limiting the number of new IPOs in the US market to only a handful per year.

2) And then just have the US Government offer either special very low interest rate financing to these companies that are in trouble, and/or offer to insure these troubled mortgage packages. With insurance attached to them, they will finally be sellable, and you will create liquidity in the credit market instantly. You will also force these companies to work their way out of the mess themselves. The cost for this might only be $40 Billion or so to the US taxpayer. This covers the other 35% of the market trouble for fractions of the cost of the proposed bailout and keeps the government out of the market as much as possible.

3) Follow this up with lots of reform of Fanny Mae and Freddy Mac. As much as it may hurt in the short run, they need to tighten the requirements to be able to get a loan. No more zero down, with poor credit and not enough income! These lax lending regulations through Fanny and Freddie caused most of this trouble in the first place. Once the market comes back, we will have people in homes in solid financial condition and this won't happen again!

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