Interest Rate Roundup

Wednesday, November 12, 2008

The TARP gets a makeover

Remember that whole thing about buying up billions of dollars in crummy assets and securities to shore up the banking system? To restore confidence in the market for securitized assets? And to establish clearing prices (possibly above-market prices) for some of this paper, thereby allowing institutions to start marking UP their assets rather than marking them down?

Never mind. We're shifting our focus elsewhere. At least, that's what Treasury Secretary Henry Paulson essentially said today. More details below ...

... from the Washington Post:

"U.S. Treasury Secretary Henry M. Paulson Jr. said he wants to expand the government's $700 billion bailout program to include credit card, student loan and car loan companies, part of an effort to ensure that households and businesses have access to a broad array of borrowing options.

"In a speech this morning, Paulson laid out his priorities for some $350 billion of the bailout fund that remains uncommitted. Much of the first half was used for direct capital investments into banks.

"At least some of the the remainder, Paulson said, should be used to reinvigorate the market for credit cards, student and auto loans -- which combined account for some 40 percent of consumer credit.

"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.

"His comments amount to a significant shift in the use of the bailout fund from a program to remove troubled loans from the books of financial institutions, and into an effort to support household and business spending at a time when both are in decline.

"Paulson said that the original plans for the Troubled Asset Relief Program -- to buy bad mortgage loans from banks -- has now been shelved in favor of other uses for the money.
Originally "the focus was buying illiquid assets," but now "this is not going to be the focus," Paulson said. In planning how to use the rest of the TARP funds, Paulson said that supporting consumer lending emerged as one of the top priorities."

... and from the Wall Street Journal:

"Secretary Henry Paulson said the Treasury has put a plan to purchase illiquid mortgage-related assets on hold.

"Meanwhile, the Treasury Department, signaling a new phase in its $700 billion financial-rescue plan, is considering requiring that firms seeking future government money raise private capital in order to qualify for public assistance, according to people familiar with the matter.

"The move isn't expected to apply to the existing $250 billion capital-purchase program, which is already injecting money into banks. But Treasury is considering attaching such conditions to any of its future capital investments, these people said.

"We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments," Treasury Secretary Henry Paulson said in a broad speech on the Troubled Asset Relief Program, known as TARP, the global credit crunch and the government's recent steps to address the financial meltdown. "In developing a potential matching program; broadening access in this way would bring both benefits and challenges."

"At the same time, Treasury is unlikely to conduct any auctions to purchase bad loans and other troubled assets -- the original intention of the $700 billion rescue plan. Instead, Treasury is expected to continue focusing its firepower on injecting capital directly into the financial sector, these people said.

"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," he said, according to his prepared remarks.

"House Financial Services Chairman Barney Frank (D., Mass.) said that Treasury disagreed with the plan to put asset purchases on hold. "We have a need to use that funding" for that purpose, Mr. Frank said at a hearing on Capitol Hill. Mr. Frank noted that Congress gave Treasury explicit authority to buy up mortgage-backed securities and whole mortgage loans as part of TARP.

"Treasury has just $60 billion left in its rescue fund, and either the current or next administration will have to turn to Congress to request the second half of the promised $700 billion. Treasury has so far committed $250 billion to banks and is spending an additional $40 billion to buy preferred shares in American International Group Inc., the big insurer.

"Treasury is expected to widen its program to inject capital into smaller, closely held banks, and is considering expanding its rescue to other nonbank financial institutions, such as insurers and specialty-finance companies. It may also do another round of financing for publicly traded banks. In addition, Treasury is under increasing pressure from Democrats in Congress to open the program to the ailing auto sector."

2 Comments:

  • This just shows they FED and Treasury have no idea what they are doing and making this up hour by hour. This is quite sad.

    By Anonymous Anonymous, at November 12, 2008 at 8:02 PM  

  • Once again Congress has failed to use its congressional oversight to protect the American people.

    "Fool me once
    Shame on you
    Fool me twice
    Shame on me."
    --Chinese Proverb

    http://nomedals.blogspot.com

    By Blogger Jason, at November 14, 2008 at 1:11 PM  

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