I will not repeat the lucid arguments made by Peyton Young of the Brookings Institution in this newspaper this week. Suffice to say his research proves the government’s willingness to offer substantial leverage and shoulder most of the losses will have a perverse effect. The higher investors bid for the assets, the worse off taxpayers will be and the better off banks will be.
Banks made the situation even more explosive by letting it be known they would love some of those cheap government loans to bid for toxic assets being sold by rivals.
But the government’s clumsy design of the PPIP and the banks’ financially-incestuous schemes pale in comparison with the U-turn by the Financial Accounting Standards Board (FASB). A few choice words from politicians was all it took for the fearless members of the accounting watchdog to turn from staunch defenders of “fair value” to advocates of the more “flexible” approach so beloved by banks.