TARP, PERP, OR 'WHAT, ME WORRY?'

On October 2nd I observed that the TARP program was unworkable due to the taxpayer guarantee clause, and now Hank Paulson has essentially confessed as much.

About 1/3 of the TARP program is being used to buy preferred equity in U.S. banks in an effort to provide liquidity to these institutions. However, the Treasury could not find a way to guarantee that the taxpayer would not be caught holding the bag if they went ahead and purchased the toxic assets on bank balance sheets (duh), so they are not buying the stuff. And, it is completely unclear what they plan to do with the remaining $500B.

While the legislation is still called "TARP" for "troubled assets", the implementation should be called "PERP" for "preferred equity", or, more appropriately, "WHO THE HELL IS RESPONSIBLE FOR THIS CRAP?" From the look of Hank Paulson above, it seems like he's saying "Don't Blame Me!"

What does this mean? I means that a great big heaping pile of uncertainty has been dumped on the financial markets and that the current administration is doing its best to wriggle, or slither, all the way to January 20th.

Of course the markets, which abhor uncertainty, sold off on the mere announcement that Paulson was to speak. If the banks have to continue to carry their toxic assets on their balance sheets, and if these assets continue to be marked down, what does this mean for their ability to lend? Frankly, it means that they won't lend even if Hank Paulson turns red in the face exhorting them otherwise.

A bad loan, or any other toxic asset on the books, is only a problem when you write it down or write it off. In the mean time, it can happily sit there like a rosy turd and basically do no damage (apart from the stink). If the Treasury can't buy the crap, then nobody else will and there essentially is not a market with which to put a price on these little piles of poo. Therefore, the SEC should place a moratorium on "mark-to-market" accounting practices.

While this isn't going to make the banks balance sheets smell any nicer, it will postpone the day of reckoning and will enable them to put the cash infusions to work in the form of new loans.

If this Administration waits until January 20th to take these steps, Fannie, Freddie, and a whole mess of regional banks are going to fall into receivership and the Fed, the FDIC and the Treasury will be overwhelmed.

--Christian Antalics