Bonds have principle, and interest, and the interest is set, the principle is revalued according to changes in the interest rate. (bonds are bought and sold, mark to market every day)Normally rising interest rates are bad for bond investors. The other component of value in a bond is the rating, and while interest rates may be falling, a lowered rating will hurt the bonds value, as most institutions are guided by charter to own only bonds with high ratings. If bonds in their portfolio fall below the minimum rating then the fund sell the bonds, which depresses the value.

You can buy the interest only on a bond, they call it a coupon.

The plethora of mortgage bonds are not traded through the bond market, were never marked to market. Although if you looked really hard and you knew where to look you might find them, your broker might not be able to move in that market anyway.

The mortgage bonds were rated however, and the ratings proved optimistic.

If a bank holding a bunch of this stuff could get a good enough rating, they could move the position off the books. That removed them as a liability, and freed up cash. However when the rating comes back down, they must take those bonds back on the books, and now the liability is even bigger.

The liability is how much they must hold against future payment on the interest, I think.

Suspending mark to market rules isn't necessarily a bad thing, the parties who buy and sell these things do their due diligence, make bets on the economy, and hedge their positions. A mark to market price implies a bid under the market, which supports the idea there are no buyers for these things even at distressed prices.

Bill Gross has called the bailout package a lead pipe cinch, he sees the Fed buying these MBS, clipping the coupon, and selling the principle to taxpayers. They in turn repackage these bonds, and sell them again, at a profit.

If it sounds like they are cooking the same chicken twice, I agree, but right now mark to market rules don't mean anything because the market is frozen. The sellers of this idea want us to believe that the invisible hand of government can pull this off.

First things first the off market paper has to be liquidated, or brought to market and fairly priced. Only the Fed has the wheels to do this, exchange Treasuries for toxic crap, but it far exceeds their reserves.

Without mortgage resolution the titles on these properties are in limbo, a big problem. COngress could confiscate the titles, and then bargain from that position. The mortgage lending business and their lobbyists are against it, and the COngressional encumbents know that a recession is a big obstacle to their reelection, so the devil and the anti-christ are working together (to borrow from Jon Stewart last night).

of course these banks should be forced to value this paper at mark to market prices, but what does that achieve? Bankruptcy?

Forced liquidations at pennies on the dollar and an instant deflationary vortex. The real problem is that they don't want to allow this thing to unwind slowly, they want an instant fix, which could be disasterous. Maybe in six months those mark to market prices will be better, give it a chance.

We all feel that way, on the secondary roads the people of California now honor people who die on those roads the way people in Mexico have done for years, they place crosses, and paper flowers, and make small monuments. The freeway system somewhat forbids that.

Careful Garrison, you are being seduced. That black attache case you have, must seem very heavy, doesn't it?

"Just when you think you have the key, they change the locks." Woody Allen from Annie Hall I think.

It was obvious there was deflation, and the deflation in credit was leading the way. Credit just kept getting cheaper, (the same experts who support the bailout package want the Fed to drop interest rates, dramatically) until suddenly there was no credit? This one is hard to figure. How is making credit cheaper going to solve this problem.

Forget the bailout plan for a moment. The Fed has been lowering interest rates, and credit is becoming scarce.

There are a couple of things that might explain it, after all loaning money at next to nothing has very little upside.

Then there is that moment at the bottom of a deflationary cycle, when no one wants to sell their commodity because it is too cheap. So the supplier pulls his supply off the market and waits for inflation, a natural consequence of low interest rates AND easy money, to take effect. Why sell something today that might be worth twice that tomorrow?

If you like plan B then stand by for hyperinflation.

The only solution to prevent hyperinflation is easy money, 700B worth. But it just puts off the inevitable. The stock market smelled hyperinflation today, (the inflation which raises all boats). Its just not clear if we have turned that corner.

But with credit becoming more dear, certainly the cost of borrowing will go up.