Summary
PFAS, a Pawnbroker For All Seasons, is a concept articulated by Mervyn King, the former governor of the Bank of England, who explained it in a book entitled “The End of Alchemy”. It’s a response to the financial crash of 2008 and the subsequent efforts to prevent another crash in the future. Essentially it creates an explicit promise that the US Federal Reserve will back participating institution’s assets, a promise that at the moment vaguely implicit, but with the caveat that the Fed will require those institutions to certify every year the value of their assets based in commonly accepted financial metrics. Which is to say some will be backed at 100 percent of their value, some at a much lower assessment. The example might be cash is worth 100 percent, junk bonds maybe 50 percent, the much maligned CDOs at 10 percent, and Synthetic CDOs at, bluntly, zero or worse depending on badly they were constructed. It’s a market based solution that is crystal clear on what the government will and will not make whole if an institution encounters difficulties. It’s also an excellent means of gathering intelligence on what is happening in the market in order to create and adjust policy. If institutions do not choose to participate, then they will know without question the US government will NOT bail them out.
