First cause. An absolute lack of accounting rules for derivatives. Nobody knows *exactly*, in dollar terms, how many “toxic assets” are “out there.” How is it possible that trillions of dollars in assets are simply unaccounted for, to the point that nobody knows who owns them and nobody knows the answer to “how much?” question?

Second cause. Predatory Lending. Predatory lending must be either eliminated as a practice or tightly controlled in the mortgage market. Increasing the interest rate during the life of the mortgage increases the likelihood of the mortgage default. We cannot have a system that makes mortgages more likely to fail as time passes, simply because of a contract clause. If an clause is “a must”, then mortgage should not be granted, period. Bring more cash, then re-apply.

Third cause. An absolute lack of accountability and responsibility for the success of financial operations. CxO-level executives must be 100% accountable for the performance of their business. Their paycheck must depend on it.

Fourth cause. Broad lack of understanding of key risk concepts. How many crisis do we need to prove this point? Starting with LTCM, then moving to Enron and now the global crisis. It is safer to assume that current risk models should be completely revamped than to assume that they will work again, eventually.

Fifth cause. Broad lack of education about how financial markets work. If market participants, including home owners and other investors, would spend some time to learn how markets work, markets would be more self-controlling. Instead, we have this casino-like system which seems to work as long as someone is supplying the coins.

Sixth (bonus) cause. Whining about the market. Stop whining. If you cannot afford your mortgage, find someone to live in your basement and help you pay for it. Take responsibility.

Guaranteeing house prices?! I want folks more worried about the price they pay for their house not less. I don’t want folks to look for the government to toss them yet another binky if things go (further) south. I want more, not less private capital in homes that do sell too -why put more than 5% down if daddy government is taking the downside risk? Talk about open-ended liability and fraud potential.

While most would agree houses were overvalued, there is no proof one way or the other that homes today are undervalued, fairly valued or overvalued. If we knew (and we can’t) that houses were undervalued today, this recommendation would be a freebie to the government. Any other situation, its a boondoggle. Maybe I do this for Detroit, where the median home price is under $20,000.

The refi America at 4.50% creates a lot of unintended consequences that hurts far more banks (the liitle guys) than you think. Think of all the S&L-like institutions, with 50-60-70% of their assets in residential mortgages -in performing, very refi-able mortgages, refi-ing down to 4.50%, extending durations back out to maybe 6-8-10+ years for the portfolio lenders. Think of the holders of (nonprivate-label) MBSs seeing their high yield securities come back at par.

Unless the plan includes Fannie/Freddie selling back to the banks mortgages securities at substantial discounts to replace lost loan yields you risk killing off the little guys to help the big guys. Now all you’ve done is shift credit risk from the largely healthy banking sector to the Feds.

This would certainly help holders of private-labels however -in particular downgraded senior tranche holders. In some cases, rapid prepays get me entirely out of some cashflows before credit losses overtake the subs. Even in cases it does not, it reduces the balance in my tranche leaving me with a smaller-balance downgraded tranche. This in effect liberates the AAA portion of these tranches quickly.

I would not suspend capital requirements. The requirements aren’t the problem, its the flawed accounting rule requiring P&L charges that grossly exaggerate economic reality, thereby triggering its own rolling series of economic consequences.

I hear some of the MTM mavens, including Buffett (who I greatly admire) saying not to suspend or eliminate MTM because it gives Management to much discretion on asset valuation -yet, bankers have this discretion on its loan portfolio and no one is saying this is broke? Banks typically hold twice as many loans as investments yet we can’t trust management to apply the same discretion in determining loan losses to fixed-income cash flows collateralized by loans?

Also, forget the MTM holiday -it sounds like a gimmick. It just looks cheap. The issue needs to be addressed head on. The current crisis has identified a huge flaw in current fair value accounting practices and the FASB, if it wants to retain its current role, needs to open its eyes and fix it.

If behavioral finance is a academic field of study, so should behavioral accounting. The FASB does not get the fact that not all readers and users of financial statements have to time, talent and aptitude to make qualitative judgements about the various components of various financial statements. They’d be far better off going with historical/amortized cost on the financials and footnoting fair values (with discretion to also include intrinsic/economic values) than the current mishmash approach we now have.