Friend, you have to forget about face value. These assets sure do have some value but they have been leveraged beyond comprehension, so many banks currently have a NEGATIVE value in my book.
If you buy MSFT at $15 on 50% margin and the stock gets cut in half, you have ZERO, yet the stock still has a value of $7.50 per share. Now, imagine if you bought MSFT at 15 and the clearing firm allowed you to have 400% margin coverage and you took that leverage and bought other stocks on margin anf THEN the stock price was cut in half. OOOpppps, you now owe the clearing firm...$XXXX to get whole.
Bottomline, if the Fed government had execute the TARP as initially constructed and removed these toxic assets form the banks books, we would not be down so far and the financial system would not be teetering. These assets WILL reinflate, if that could happen off the banks books, all would be well. Instead we are throwing trillions at the problem and it is not going away.
When the history is written, I think the biggest mistake will be the governments inability to remove toxic assets form the banks books in the Fall of 2008.
The mortgage holder owns the asset, namely the house. As long as the loan is performing put the depreciation on the owner's balance sheet, not the banks. Bank's interest if first and foremost on the loan. As long as the loan is performing there is no impairement. Get rid of m2m.
The other is who is to value MSFT as $7.50 in your example if there is no functioning market.
Government in the end gets its money taxing the private sector. The market is saying please kill these big bank basket cases, please kill the zombies, I'm begging you. And it ain't happening and so it goes down more and more. Not near enough money to buy these toxic assets pennies to the dollar in any meaningful way. Reset and start over is the only way to real recovery for many of these banks and its more systemic risk to say too big to fail and trying to manipulate bank stock prices by the government NONtax money (just printing money now, crazy)