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TARP On Ice

by afew Tue Nov 18th, 2008 at 03:13:18 AM EST

Henry Paulson announced yesterday, in an interview with the Wall Street Journal, that he was not planning to go any further with the $700bn bailout that the US Congress was persuaded to grant only a few weeks ago.


The original intention was to build a team to evaluate toxic assets on banks' balance sheets and buy them out, but none of this has been done - Paulson already announced last week that the stables-cleaning plan was abandoned. Now he appears to be putting the entire bailout on hold until the new administration comes in.


"I want to preserve the firepower, the flexibility we have now and those that come after us will have."


TARP spending so far (WSJ) ===>


This bailout freeze might reflect, in terms of power politics, a stand-off between Obama and Bush over the use of financial firepower. Paulson clearly says he won't be using bailout money to help mitigate the effect of mortgage foreclosures, as House Democrats asked him and Fed chief Ben Bernanke yesterday (Pelosi: they must take immediate action and do everything they can to help hard-working Americans stay in their homes).

But there's also a statement of failure here (my bold):

Paulson Will Keep Reserve To Stay Flexible for Future - WSJ.com

On Tuesday, Mr. Paulson could face a hostile reception from lawmakers when he testifies about the bailout, including Treasury's decision to forgo its initial plan to buy bad loans from banks and other entities, and instead inject capital directly into banks. Mr. Paulson plans to tell Congress that Treasury couldn't pursue its first option because after investing $250 billion in banks, it didn't have enough left to make a meaningful impact.

"We recognized that a troubled-asset purchase program, to be effective, would require a massive commitment of TARP funds," Mr. Paulson plans to say, according to a draft of his prepared testimony, referring to the Troubled Asset Relief Program.

Mr. Paulson defended that decision, saying Treasury's equity-purchase program has helped stabilize the financial sector and limited the potential for the future collapse of any big financial institution. "We've turned the corner in terms of stabilizing the system. There's no longer this worry out there that some systemic institution is going to fail."

Still, Mr. Paulson acknowledges that dropping the asset-purchase plan will leave a key problem unresolved: "These institutions are still clogged with these assets. They're going to need to write them down, sell them over time, take losses," he said. Mr. Paulson added that he is working with the Fed to develop a lending facility that would encourage investors to buy some of these assets.

In other words, a long and troubled unwinding road ahead. What use has been the TARP?

Display:
The TARP has thrown $250bn at banks and $40bn at AIG. Mission accomplished?
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Nov 18th, 2008 at 03:19:30 AM EST
Merry Christmas! (Jingle, jingle.)
by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 18th, 2008 at 04:54:14 AM EST
[ Parent ]
I seem to recall Krugman saying back when this plan was broached that spending the money on toxic assets would have little effect compared to using the money for capital infusions.

Reality-based - the new black?

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Tue Nov 18th, 2008 at 04:10:47 AM EST
It was never supposed to have much of an effect.

Is it too cynical to see this as a final pre-election smash and grab?

With Obama the rules have changed, and there's an uncomfortable hint of possible accountability, combined with threats of a smaller credit card limit.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 18th, 2008 at 04:58:58 AM EST
[ Parent ]
I think accountability goes to the heart of it. I believe Paulson was genuinely trying to help his caste out of a tight spot - without requiring them to account for their mistakes - and has only recently realized that there may not be that much money in the universe.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Tue Nov 18th, 2008 at 05:51:50 AM EST
[ Parent ]
So you're saying Paulson is incompetent, rather than evil?

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Tue Nov 18th, 2008 at 06:00:01 AM EST
[ Parent ]
Well, given that Paulson was trying to help his friends at the expense of the rest of us... I think incompetent AND evil sums it up... ;-)
by Metatone (metatone [a|t] gmail (dot) com) on Tue Nov 18th, 2008 at 06:04:01 AM EST
[ Parent ]
I'll go with evil, but not necessarily incompetent.

Getting his caste off the hook both financially and in terms of accountability was probably virtually impossible from the get-go. The fact that he tried to do something supremely difficult and failed does not necessarily indicate incompetence.

Of course, the whole thing was attempted with a cavalier disregard for the general welfare.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Tue Nov 18th, 2008 at 06:15:28 AM EST
[ Parent ]
I have been lurching around a triangle of Incompetent, Evil and Evil and Incompetent.  Perhaps I should make it a Square Dance by adding Evil and Befuddled.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 18th, 2008 at 11:49:54 PM EST
[ Parent ]
... its not falling in the water that leads to drowning, its staying in the water.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu Nov 20th, 2008 at 10:23:28 AM EST
[ Parent ]
... which were convenient rationalizations during the bubble years, but when the system is in crisis and an actual understanding of how the system works is required, leaves him ill-equipped to cope with the crisis.

Kind of like Hoover in 29-32.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Nov 18th, 2008 at 10:24:44 AM EST
[ Parent ]
Yes. Failed visualizations-the mistaken and oversimple assumption that social/economic reality is a collection of at least more-or-less linear and quasi-separate processes, which conveniently justify-or define as inevitable- elite plunder.
 The world of human endeavor as machine--again, and again. Like B.F. Skinner's failed models of human psychological functioning.
Models that only seem to work because there is a positive feedback loop in the gears-- the more the elite believe the pronouncements of academia, which become their own bullshit, --the more people tend to play their role in the melodrama. And the more academicians analyze their own waste, and pronounce it human nature.

But when real crisis rolls around, the old narratives get trashed. To be replace by--what?
It's not yet happened. It will.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Nov 19th, 2008 at 10:27:12 AM EST
[ Parent ]
Yes, I think (evil apart) that Paulson and his team may have come to the realization that shovelling out the Shitpile™ is beyond their capacities, in volume and in time.

So balance sheets will go on carrying unpriceable assets. How Paulson can tell us the risk of systemic collapse is taken care of, is perhaps a question for lie-detector treatment.

Can.Down.Road

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Nov 18th, 2008 at 07:25:15 AM EST
[ Parent ]
... liquidity filling the books of the Federal Reserve Banks with crap was the solution to the problem should have no problem believing that this time prosperity is just around the corner (after a small inventory recession to clean out the pipes, of course).


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Nov 18th, 2008 at 08:10:02 PM EST
[ Parent ]
He no longer believes. He's crapping his pants. I think his testimony before congress was the reflexive defense of an arrogant and powerful man caught in water too deep for him.
His world is falling apart. But, he deserves to be recognized as at least aware of that. Most of the rest are still looking for a goat in any closet.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Nov 19th, 2008 at 10:32:06 AM EST
[ Parent ]
Some has $250 billion more money than they deserve to have...

Who are those profiteers?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 18th, 2008 at 04:46:59 AM EST
I believe that it was a conundrum without a correct answer no matter what.

Reading between the lines of the Citi press announcement yesterday, both the written and the public statement by the big cheese, the 25 billion that was 'forced' on them, is what they have to brag about. They made reference to it to counter the smudge of laying off another 53,000 people (a significant percentage because of asset sales to a German company.) They claimed to be in better shape than Wells and BofA. Citigroup to shed another 53,000 jobs

Part of me is a "We are the forces of chaos and anarchy" type who believes in and would love to see the system reset in a way that disavowed the connivers who pay for the "How Low Can You Go" Limbaugh-esque propaganda.

Part of me says that the rebellion won't be pretty and the guys with the guns aren't on the side of more National Parks and long term benefits for all the stakeholders.

Unfortunately, the middle ground was loaning bucks to the bankers (without gaining corporate control) and it worked to the degree that the system is apparently able to somewhat stand against the current whirlpool.

I'm not sure that holding back at this point, leaving some ammunition in the gun so to speak, isn't a bad idea. Throwing money into the black hole of alleged value of homes seemed like a bad way to keep people in their houses.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Tue Nov 18th, 2008 at 06:06:41 AM EST
[ Parent ]
There's what purports to be a list of all institutions receiving "TARP money" here.

Interestingly, if I'm reading this right, none of this money seems to have been spent on toxic assets.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Tue Nov 18th, 2008 at 06:10:04 AM EST
[ Parent ]
No, none. (Also see the WSJ article linked in the story).

At the time the plan was launched, there were those who pointed out that it would normally take months if not years to sift through and evaluate all that crap. (Can't find the comment where I quoted this...)

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Nov 18th, 2008 at 07:32:35 AM EST
[ Parent ]
One potential explanation for 'TARP On Ice' is during the latter half of the derivatives madness; there weren't many real toxic assets as part of the tranches being sold by the 'investment banks'. Anotherwards they new the sub prime was going to default and just made up the sub prime part of the derivative without any actual mortgage being held. So Paulson knows, since he was there at the time, the government buying the 'toxic assets'; would be exposing the banks and brokers to the fraud they had perpetrated, through their derivative sales.

Michael Lewis, the author of Liar's Poker, has an interesting article about how short sellers couldnt understand why the investment banks were offering them to short their derivative sales until the short sellers realized the banks needed short sales in order to perpetrate the fraudulent long transactions they were selling. Link is:

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boo m#page1

by An American in London on Tue Nov 18th, 2008 at 09:03:04 AM EST
most likely reason that the whole scheme blew up - too many people became aware of the gigantic short sale going on. Two effects: 1) bidding up the price of a CDS and 2) some gamblers started to sweat and fidget (not a good sign for gamblers).

I'll throw in one other off-the-wall suggestion on the holdback of further bail-outs at present: they can't sell enough bonds. The Chinese, Saudis, etc. may have told them that they're not in the market. The Chinese, for one, have decided to use what's left of the US$ credibility to finance their huge infrastructure, public-works projects.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Tue Nov 18th, 2008 at 11:07:32 AM EST
[ Parent ]
"they can't sell enough bonds"
That's what a lot of us have been waiting for- or fearing-- the ultimate day of reconing.  You could be right.

"--use what's left of the US$ credibility to finance their huge infrastructure, public-works projects."

Paul, to fail to prop up the bond zombie will immediately trash that cred.
The time frame would seem to favor converting cash held into commodities, real estate--real-world assets- while keeping the corpse moving enough to sustain the illusion. But that's an awful lot of real assets. Who could miss a movement that size? How could it be hidden? Look there, I think.


Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Nov 19th, 2008 at 10:44:38 AM EST
[ Parent ]
What an amazing article.  I recall several instances in the spring where Steve Eisman's pronouncements were shown  wry appreciation by Alan Abelson, my favorite columnist in Barron's.  Financial services company CEOs regarded him as the Devil incarnate.  The truly amazing thing about him, Meredith Whitney and the others mentioned in the article is that the only defense Wall Street had for their devastating insights into the fraudulent nature of the entire "securiturization" business was that it hadn't yet collapsed.

Sinclair Lewis reportedly noted that "it is very hard for a man to understand something if his livelihood depends on him not understanding it."  I guess that the essence of the bull mentality is: "Don't look a gift horse in the mouth."  It seems that the vast majority of the players are simply incapable of attempting such a feat.

I recall my mortgage broker in Los Angeles indicating that some of the real estate appraisers in the local market could generally be relied on to meet or exceed the proposed sale price with their estimate of value.  If you did not do so, the sale might fail and repeat business would dry up.  The nature of the compensation system guaranteed that Gresham's law would come to prevail regarding the intrinsic worth of the estimates.

I suspect that one has to have been knocked around a bit in order to be able to see such things.  Else it is too easy to go along in order to get along.

The bit about short sales enabling the continuation of the market illustrates the importance of personal interest and profit to understanding a transaction.  To the short seller, he wants to sell short because he thinks it is going to tank.  To his counter-party, his short sale is the equivalent of printing another security certificate with a slightly reduced face value.  He assumes it won't tank.  The dependence of the market on conflicting assumptions is probably why it is so tricky to understand.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 19th, 2008 at 01:38:56 AM EST
[ Parent ]
I assume you are referring to this one:

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they'd be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn't expect was that any future reader would look on my experience and say, "How quaint."

I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, "I hope that college students trying to figure out what to do with their lives will read it and decide that it's silly to phony it up and abandon their passions to become financiers." I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.

Somehow that message failed to come across. Six months after Liar's Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They'd read my book as a how-to manual.

Great. Chilling.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Nov 19th, 2008 at 11:00:05 AM EST
[ Parent ]
Yeah. Great article.  I sat out the entire bull market of the '80s because I couldn't see how it could not blow up.   Had my 401K in CDs, which at least were paying 6-7%.  Most of my colleagues were in Magellan and did much better.  I finally went into mutual funds in the 90s and  did well until 2000. Did ok again from about 2002 to November 2006, when I pulled out of funds and went all cash.  I thought it certain that the market would drop after the election.  So I missed 2000 points on the Dow.  Still beats riding it down to 8,000 or below.  The very best thing I did was selling my house in LA in the fall of 2005.  Wasn't ready to retire, but saw the real estate collapse coming and didn't want to be on the wrong side of it. Dumb luck beats no luck at all.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 19th, 2008 at 11:45:07 AM EST
[ Parent ]
are currently being grilled by Barney Frank's House Banking Committee.

Sheila Bair is a rock star. Her answers are short, to the point, and she's been busy working with banks and mortgage companies in a largely successful (so far) effort to work with homeowners in trouble. The government loses a little, the banks lose a little, and the homeowners lose a little (the lower market value of their homes). But people get to stay in their homes.

Bernanke is a lightweight. I have no confidence in his ability to grasp what is going on.

Paulson is a flat-out liar. He doesn't respond to questions, he repeatedly cites "groups of people" elsewhere either researching some aspect of the financial mess (so he can't at this time respond), or busy drawing up some kind of plan for something or other, after which the plan will be "evaluated." In other words, he means to do nothing.

Three points of contention between Paulson and Congress: TARP funding for bank M&A's  - picking winners - (National City Bank was discussed in detail - evidently they were told by regulators not to even try and apply for TARP funds while PNC was trying a hostile takeover financed with TARP funds), TARP funds being used for delinquent mortgage relief (Paulson refuses to do this, even though it is explicitly written into the TARP appropriation bill), and CEO compensation (which Paulson refuses to regulate).

Paulson is running a personal/ideological agenda, and TARP gives him a huge amount of clout. I assume that he's busy rewarding his wall street friends and/or attempting to maintain dollar hegemony.

And it's obvious that Barney Frank has absolutely no confidence in Paulson's integrity. Neither do I.

Hopefully, the transcript will become available shortly.

"It Can't Be Just About Us"
--Frank Schnittger, ETian Extraordinaire

by papicek (papi_cek_at_hotmail_dot_com) on Tue Nov 18th, 2008 at 12:56:21 PM EST
I heard this today too.  Looks like some in congress would like to expand FDIC's (Blair's) program to help/"encourage" banks to refinance troubled mortgages rather than let them go into foreclosure. If there are enough well-intentioned home buyers out there this might do a lot to ease that part of the crisis, but I have my doubts.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Tue Nov 18th, 2008 at 10:06:46 PM EST
[ Parent ]
according to Bair, she's presently working with 60,000 total foreclosures, of which roughly 40,000 are eligible, for income, existing debt, owner-occupation,  or other reasons, for loan modification. She expects that 30,000 of those  will successfully reach agreements with banks and get some mortgage relief.

The program is evidently set to explode, as Bair projects she'll be working with some 1.5 million foreclosures in 2009 (hard to believe she's set up to work with that volume), which appears to be somewhere around 30% of projected foreclosures next year.

"It Can't Be Just About Us"
--Frank Schnittger, ETian Extraordinaire

by papicek (papi_cek_at_hotmail_dot_com) on Wed Nov 19th, 2008 at 10:27:20 AM EST
[ Parent ]
Unless I'm mistaken, I think Blair was only working with IndyMac clients at this point.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Thu Nov 20th, 2008 at 02:54:38 PM EST
[ Parent ]
Good partiaol summary. Thanks.
I like your signature. Mine, only more succinct.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Nov 19th, 2008 at 10:49:55 AM EST
[ Parent ]
Paulson has an OpEd at NY Times:

WE are going through a financial crisis more severe and unpredictable than any in our lifetimes.  [We] faced [big failures] in succession, as our financial system seized up and severely damaged the economy.

By September, the government faced a systemwide crisis. After months of making the most of the authority we already had, we asked Congress for a comprehensive rescue package so we could stabilize our financial system and minimize further damage to our economy.

By the time the legislation had passed on Oct. 3, the global market crisis was so broad and so severe that we needed to move quickly and take powerful steps to stabilize our financial system and to get credit flowing again. Our initial intent was to strengthen the banking system by purchasing illiquid mortgages and mortgage-related securities. But the severity and magnitude of the situation had worsened to such an extent that an asset purchase program would not be effective enough, quickly enough. Therefore, exercising the authority granted by Congress in this legislation, we quickly deployed a $250 billion capital injection program, fully anticipating we would follow that with a program for buying troubled assets.

[snip]

A troubled-asset purchase program, to be effective, would require a huge commitment of money. In mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum, in a worse economy, simply isn't enough firepower.

A huge commitment of money? Whatever you ask, Paul.

There is no playbook for responding to turmoil we have never faced... [If] we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract.

I thought secretaries of treasury are supposed to look less clueless.

A list of top 11 Paulson's blunders is here.

by das monde on Tue Nov 18th, 2008 at 09:24:26 PM EST
Shorter Paulson:

  1. No one could have predicted this;
  2. Congress got in my way just when I was saving the world;
  3. The dog ate my homework.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Nov 19th, 2008 at 02:10:25 AM EST
[ Parent ]
You have a real talent for summarising ;-)

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Wed Nov 19th, 2008 at 04:46:19 AM EST
[ Parent ]
Thanks so much. You just saved me reading another 10,000 words of Paulson BS.
Phew! Smells better in here.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Nov 19th, 2008 at 10:51:35 AM EST
[ Parent ]
Sheesh.
My take: I think Paulson's credibility with the financial markets has been exhausted. Now I am not sure what the magic solution was. Maybe some recapitalization of key players plus an Uncle Sam-led home refinancing plan. Or maybe a) suspending mark to market, b) a zero capital gains tax for the next five years, and a corporate income tax holiday.

Wow. What insight. Reduce taxes.
 
But I will give this to Paulson: He does strike me as a guy who is working himself near death to deal with an amazingly tough problem.

- James Pethokoukis
 I can agree with the last--Paulson's giving it his best shot. But through those good old neolib, market-as-God glasses, Paulson's useless.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Nov 19th, 2008 at 11:13:04 AM EST
[ Parent ]


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