Smarter minds than mine have noted a key instance in which Ben Bernanke’s opening testimony deviated from his prepared statement. Both Paul Krugman and Felix Salmon seized on the following passage:
I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.
First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down …
One of the most critical questions in evaluating the Paulson plan is figuring out exactly what price the government would pay for so-called toxic assets. Here Bernanke is explicitly stating that banks will not have to use “fire-sale prices.”
Krugman:
As I wrote earlier this morning, the whole “take these assets off the balance sheets” line is fundamentally disingenuous; the key question is what price Treasury pays for the assets. And here we have Bernanke effectively saying that it’s going to pay above-market prices — prices that allegedly reflect “hold-to-maturity” value, but still more than private investors are willing to pay …
So the plan only helps the financial situation if Treasury pays prices well above market — that is, if it is in effect injecting capital into financial firms, at taxpayers’ expense.
What possible justification can there be for doing this without acquiring an equity stake?
Salmon:
Certainly under this system no outside investor would ever want to get involved. This is a bailout pure and simple, with the government paying too much money for banks’ assets. And I don’t like it at all.
