“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Thursday, October 2, 2008

Bob Corker (R-Tenn) Is An Idiot

This morning, on CNBC, I saw a Republican Senator, Bob Corker of Tennessee, make an absolute idiot out of himself.

He did it in a conversation with Dick Armey, a former GOP House Majority Leader and professor of Economics.

After Armey spent several minutes explaining why another failed attempt to pass the financial sector rescue bill in the House might actually be a good thing, he reiterated the point that all that is needed is to rescind, suspend, or modify 'mark to market' accounting to allow performing securities to be valued at their economic, 'hold to maturity' value.

Corker replied that this was not the case. To illustrate his point, the windbag from Tennessee compared a commercial bank to a farmer.

Corker described farmers who were 'land rich, but cash poor,' thus being unable to pay bills, but not being insolvent.

He then went on to tell Armey that US banks would have their fixed asset values refurbished by suspending mark-to-market accounting, but that they would still be 'cash poor.'

He then went further, saying that it was this cash need which the rescue bill would meet.

It's hard to believe just how stupid Corker is.

A commercial bank holding CDOs has nothing like the problem of a farmer with no cash, but valuable land.

First of all, banks are not short of cash. The problem is not one of having too much of a fixed asset, and too little of a liquid one, as Corker believes.

Rather, as described in this post, referencing Brian Wesbury's excellent editorial in the Wall Street Journal, the problem with mark-to-market accounting is that it

"forces all financial firms to treat potential losses as if they were cash losses."

That is, losses in theoretical value in fixed assets must reduce the bank's capital by a like amount.

The situation is nothing like Corker's farm example.

Frankly, it scares me to death to see one of the hundred buffoons who passed this monstrosity completely misunderstanding the phenomenon that is affecting our publicly-held financial institutions.

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