BLOG VIEW: Fold Up The TARP

Written by Jessica Lillian
on November 13, 2008 No Comments
Categories : Blog View

Anyone interested in purchasing some troubled mortgage-related assets? These pesky, poisonous holdings are now officially up for grabs, as the federal government has officially opted to steer its Troubled Asset Relief Program (TARP) away from mortgage-related assets and focus on consumer debt and similar priorities instead.

In remarks delivered this week, Treasury Secretary Henry Paulson first stressed that the Treasury's decision to rein in the unruly Fannie Mae and Freddie Mac and throw them in a conservatorship appears to have prevented (more) disaster. After all, although Fannie recently posted a record loss, it was still ‘within the range of what we expected,’ he pointed out.

But enough talk of mortgages. Paulson believes that now it is time for Washington to go to Plan B: address illiquidity in non-mortgage-related financial sectors rather than forge ahead with the department's original plan of buying troubled mortgage assets.

‘Over these past weeks, we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets,’ he stated. ‘Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.’

‘But other strategies I will outline will help alleviate the pressure of illiquid assets,’ Paulson claimed.

Exactly what those other strategies will entail seems somewhat undefined at this point. Paulson emphasized the importance of building capital in financial institutions – possibly through a private-capital matching investment program – while striving to protect the taxpayers whose money would fund such initiatives.

Consumer credit will likely receive a great deal of attention. According to Paulson, the securitization of credit card receivables, auto loans, student loans and similar products constitutes around 40% of U.S. consumer credit. He plans to use TARP funds to lure private investors into the distressed asset-backed securities market, among related measures.

‘While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending,’ Paulson noted.

Although the old TARP plan is not completely off the table, it has been largely abandoned for the moment. Given the enormous sums of money approved specifically for the original purpose, is such a switch allowed? Technically, but history has taught us that indecisiveness and backpedaling tend to win few points in the world of politics – and on Wall Street as well.

For instance, Alex Merk, president of Palo Alto Calif.-based mutual fund Merk Investments, told MarketWatch that Paulson's tactics have failed to inspire confidence.

‘He's been flip-flopping on every plan, and it doesn't look like he has a plan,’ Merk said. One commenter on the MarketWatch article went even further, asking perhaps only slightly melodramatically why Paulson has not yet been put in jail for his disconnect between promises and action.

Surprisingly – or not – the calls to lock up the man behind the now TARP-less TARP appear to be growing. ‘Paulson consistently fails the test of time,’ writes one commenter in response to a New York Times article on the news. ‘We really need to get rid of him – the sooner the better. He's not fit to be trusted in any public or private office. He ought to be in jail.’

This comment currently ranks as the most ‘recommended’ by the article's other readers, and the other reader-posted opinions on the site nearly universally echo the criticism.

‘[As if] Paulson and the rest of the pampered Wall Street looters have the slightest clue what they are doing except feathering their own nests,’ scoffs another reader.

Perhaps the revised program will, in fact, do its job and stabilize the consumer credit market and its associated securitization programs. Unfortunately, however, that success would only be the first step.

The country's economic woes remain inextricably tied to the mortgage crisis, and loan modification efforts – which Paulson indicated would remain a key strategy – have proven themselves to be insufficient at best. (Just ask FDIC chairman Sheila Bair, who recently commented on the shortcomings of the latest Fannie/Freddie loan mod program.)

Our best hope may be that enough parties will answer ‘yes’ to the original question posed in this blog: Anyone interested in purchasing some troubled mortgage-related assets?

As BusinessWeek explains, ‘The decision to abandon large-scale asset purchases could, in itself, help the financial system cleanse itself of the troubled assets.’

Indeed, many market participants indicated that their asset-purchase activity had been delayed while they awaited word from the government on the details of the TARP. This latest news from Paulson may be the green light they need to go forth and buy.

Jessica Lillian, Commercial Mortgage Insight

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