Bernanke Goes Off Script to Address Fire-Sale Risks
Sudeep Reddy at WSJ
Ben Bernanke argues for not buying assets at fire-sale prices in the Treasury’s $700 billion bailout. Uncertainty in housing markets and the economy are forcing financial institutions to mark mortgage securities at fire-sale prices, rather than their value if held to maturity, effectively creating a vicious circle of more write-downs that further depress asset values, Mr. Bernanke explained. Bernanke essentially argued that fire-sale prices would hurt markets even further and wouldn’t solve the problem facing the economy. “We cannot impose punitive measures on institutions that choose to sell assets.” Still, he acknowledged that the precise approach to doing so hadn’t been determined, arguing for flexibility. “We do not know exactly what the best design is,” and that would come from consultation with experts, Mr. Bernanke said. Bernanke distinguished between, on the one hand, “fire sale prices,” the ones that prevail “when you sell into an illiquid market” and, on the other, the prices that holders think the assets are really worth, sometimes described as “fundamental” values or “hold-to-maturity” value. “The holders have a view of what they think it’s worth. It’s hard for outsiders to know,” Mr. Bernanke said. The point of an auction is to reveal those prices. “If you have an appropriate auction mechanism… what you’ll do is restart this market,” he added.
Paulson, while seeking maximum flexibility, said the Treasury is considering doing auctions one asset class at a time. He said they aim to bring “bright people” to work on the challenge of designing market mechanisms.