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But if loans start trading more regularly because of the government's PPIP program, the banks would have submit those loans to so-called mark-to-market rules. That means the banks would have to take a write-down not just on the mortgage loans they sell, and get cash for, but on all of the mortgage loans on their books. Banks hold about $3.5 trillion in mortgage loans. So having to mark all those loans down $0.21, not just the ones that are sold, would be disastrous. (Read "Geitherner's Bank Plan: Only a Partial Solution")
Earlier this month, though, the Financial Accounting Standard Board proposed a change to bookkeeping rules that would allow banks to characterize these loan sales as "distressed." That would allow banks to continue to claim they could get more for the loans they have yet to sell once this whole global financial crisis thing finally blows over.
"The change to mark-to-market rules will save banks a bundle," says Robert Willens, a corporate accounting expert. "Under the new rule, you can't mark your loans to market even if you wanted to."
At the very least, the PPIP plan probably means that the proposed accounting change, which could be enacted as soon as the next few weeks, to mark-to-market rules has to happen. But even with the rule change, banks are still probably going to need more money the government in order to make the PPIP plan a success.
"Unless this plan pushes the clearing price for bonds up to $0.95, then I don't think the banks can participate," says Tyler Durden, a former Wall Street trader who now writes the popular finance blog ZeroHedge.com. "If the price is significantly less than that, banks are going to need more cash from the government or some other solution like nationalization to be able to survive."