Dave Ramsey has a solution to fix the current credit freeze and economic crisis, and it won’t cost $700 Billion.

Remember Enron, WorldCom, Adelphia, and other companies had artificially put assets on the books? They’d say something was worth $10M when they bought it, but eventually it decreased in value, and they never updated the value in the books. That was part of the fraud. Under current laws at that time, they were all convicted and put in jail for fraud.

Then we got all mad and made all these new laws that are coming out the wazoo called sarbanes oxley. It’s a huge, massive law but the idea is that we were going to mandate ethics to corporate America because apparently they didn’t have any, according to the Enron failure. It’s now a total pain in the butt to execute it in a publicly traded company.

It didn’t work because you can’t cause ethics to happen. However, it does make each company each day restate what their assets are worth if sold on the market. This accounting procedure is mark to market accounting–you need to remember that. It’s a good concept and keeps companies from having loaded balance sheets.

However, it’s part of what’s caused this in the news now. Merrill Lynch was sitting with $30 billion tied up in sub-prime loans with houses. Stupid! They get what they deserve for doing that, and I’m with you on that. Those houses didn’t become worthless all of a sudden because those people couldn’t sell their bonds. Since they couldn’t sell them, they basically gave them away for 22 cents on the dollar. Now do you think all those houses lost 80% of their value underneath that deal? No, they didn’t, so they gave them away for 22 cents on the dollar (about $6 billion total) because there was no market for them. Nobody wants to buy sub-prime bonds because they suck. They’re junk bonds. But at 22 cents on the dollar, it’s a bargain because even if you foreclosed on every one of the houses in there, you’d probably get $20 billion back out of $30 billion, and so the company that bought those for $6 billion got a deal! But there’s no market for them. That’s where these companies are stuck. They can’t sell this stuff, but accounting-wise, they’ve had to mark it down to market and it’s frozen the marketplace.

And he’s exactly right.  As a (now former) mortgage company owner, my father (who has been in the business for almost 15 years) and I were actually discussing this the other day.  Just because people aren’t lining up to buy mortgage securities at the present time doesn’t mean they are worthless.  If you have $100 Million of mortgages in a pool, even if every single home went into foreclosure and the mortgages were at 100% of their value, you would still get a return.  It may not be 100%, but it also wouldn’t be zero.

But if you have $100 Million in mortgage securities on your books, you have to have about $100 Million more in liquid assets just to offset the mortgage securities because in today’s climate due to SOX, it would be worth close to zero.

Because you have to restate asset value virtually every day, you can’t wait it out for the value to return or the mortgage to be sold.  They are a drag on the books and tie up capital that could be used for something else.  Thus there is a freeze in additional lending and companies with plenty of assets on the books appear insolvent on paper, all due to accounting standards.

Paulson and the President are right, we do need to have someone unclug the lending sink.  But Ramsey may be right and it could be done without costing the tax payers a dime.  Repeal, even temporarily, Sarbanes Oxley, and let’s get the system flowing again.