Fed Chairman Ben Bernanke made several cogent points in his testimony.
1) the fire sale prices that financial institutions are being forced to use by mark-to-market requirements are significantly less than the hold-to-maturity price. Due to the uncertainty over pricing, private capital is unwilling to come in and buy.
2) Despite the damage, suspending mark-to-market rules would hurt investor confidence because investors would have to trust the internal estimates of banks.
3) Auction methods need to be devised on what the hold-to-maturity price would be for assets bought by the Treasury. If Treasury bids at close to hold-to-maturity prices, there are several benefits:
a) liquidity would come back;
b) uncertainty would be greatly reduced, which would allow banks to attract new capital;
c) taxpayers will hold assets at close to maturity values.
Finally, Bernanke pleaded with Congress not to impose punitive measures on financial companies, because that would reduce participation in the program.
UPDATE: Fed Chairman Bernanke is continuing to make cogent points in his Q & A.
He has sought to draw a line distinguishing between this crisis and other banking and financial crises here and abroad.
His position is that the situation we find ourselves in is "unique and new."
In past crises (such as the savings and loan crisis), the government took over assets from failed institutions.
That is different from what is happening today. Bernanke is stressing that firms are not necessarily failing, they are deleverageing and are unwilling to make credit available.
To address that, the methods used to deal with failed institutions are not appropriate.
He is trying to warn the Congress away from taking over institutions (and by extension taking stakes in companies), and is encouraging them to help them provide liquidity. They do this by buying the mortgage assets.
UPDATE 2: SEC Chairman Christopher Cox, when asked what would happen after the short selling ban on financials expires, said that the SEC would "segue into sturdy protections against naked short selling."
It's been widely noted on trading desks this morning that two companies have asked to come off the SEC ban on short sales: Diamond Hill Investments and JMP Group , an investment banking firm. JMP specifically said that the restriction is "unncessary" and that short selling "is an essential tool that provides liquidity to the market." JMP is up fractionally.
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