In his testimony Bernanke just addressed mark to market accounting. He drew a distinction between “fire sale” prices and hold to maturity prices. He seemed to indicate that Treasury would try to find a way to buy the mortgage securities close to hold to maturity price. He did not give any indication of how they would do that, but as I”ve pointed out before, Treasury has to find a way to pay a price above the current, limited liquidity market price. Otherwise, this plan will not work. At least they finally said something about mark to market; we’ll see what they come up with as a price discovery mechanism.
Update: The WSJ Real Time Economics blog has more details on what Bernanke said about mark to market:
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.
Mr. Bernanke said the Treasury plan should have taxpayers buy the assets and hold them at close to their maturity value. Removing the assets, he said, would bring liquidity back to markets, unfreeze credit markets, reduce uncertainty and allow banks to attract private capital. (Reuters has a partial transcript)
Forcing assets down to even lower fire-sale prices would protect taxpayers the most, since the government would own the assets below the value if held to maturity. As long as those securities didn’t flat-out default, the government’s purchase would have a substantial upside. However, Mr. Bernanke essentially argued that doing so would hurt markets even further and wouldn’t solve the problem facing the economy. In pushing back against congressional efforts to change the Treasury proposal, Mr. Bernanke said: “We cannot impose punitive measures on institutions that choose to sell assets.” The beneficiaries would be not just the companies selling, but markets and the overall economy, he said.
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.
It sounds to me like they will use a model to determine a floor price on these securities. If the banks didn’t have a model that was accurate, why does Bernanke think he can do any better?