Suitably Flip

TARP Comes Full Circle

There's a certain maddening elegance to it all.

The original TARP was intended to purchase banks' toxic assets.  Once everyone realized that was untenable because this sea of heterogeneous securities was impossible to value (which, ah, was the underlying problem in the first place), TARP 2.0 saved the day with direct capital injections.  Once everyone realized that did little to cure the toxicity of the bad assets still on banks' balance sheets, TARP 3.0 was born.  We didn't get to know that TARP (the one that was supposed to backstop losses incurred by the bum assets) as well as we might've liked, since it quickly fractured into countless, overlapping mini-TARPs, to be divvied up among the auto, steel, and porn industries.

And now...

Maybe the original financial bailout plan to have the government buy or back the toxic debt on banks’ balance sheets isn’t dead after all.

Key Federal Reserve officials Tuesday resuscitated the idea, pointing out that financial markets are still facing severe challenges.

“A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions’ balance sheets,” Fed Chairman Ben Bernanke said in a speech Tuesday to the London School of Economics. “The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending.”

Fed Vice Chairman Donald Kohn plans to repeat that quote to lawmakers later Tuesday, according to a copy of his written testimony.

For my money, the uncorrupted version of TARP 3 had the best shot at accomplishing its goal of preventing the exsanguination of the banking system and enabling credit markets to grind back to life.  TARP Classic seems likely to squander half the money trying to value the securities, only to come up with a wholly unreliable and inconsistent appraisal and purchase methodology.  The degree of subjectivity and the dollar amounts involved leave the door wide open to fraud, waste, and abuse (and at very least, the perception thereof, which can be its own problem).

Even so, it's a better use of the funds than handing it over to Ron Gettelfinger or Larry Flynt, so perhaps I'll just keep quiet.

Comments

TARP Comes Full Circle

There's a certain maddening elegance to it all.

The original TARP was intended to purchase banks' toxic assets.  Once everyone realized that was untenable because this sea of heterogeneous securities was impossible to value (which, ah, was the underlying problem in the first place), TARP 2.0 saved the day with direct capital injections.  Once everyone realized that did little to cure the toxicity of the bad assets still on banks' balance sheets, TARP 3.0 was born.  We didn't get to know that TARP (the one that was supposed to backstop losses incurred by the bum assets) as well as we might've liked, since it quickly fractured into countless, overlapping mini-TARPs, to be divvied up among the auto, steel, and porn industries.

And now...

Maybe the original financial bailout plan to have the government buy or back the toxic debt on banks’ balance sheets isn’t dead after all.

Key Federal Reserve officials Tuesday resuscitated the idea, pointing out that financial markets are still facing severe challenges.

“A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions’ balance sheets,” Fed Chairman Ben Bernanke said in a speech Tuesday to the London School of Economics. “The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending.”

Fed Vice Chairman Donald Kohn plans to repeat that quote to lawmakers later Tuesday, according to a copy of his written testimony.

For my money, the uncorrupted version of TARP 3 had the best shot at accomplishing its goal of preventing the exsanguination of the banking system and enabling credit markets to grind back to life.  TARP Classic seems likely to squander half the money trying to value the securities, only to come up with a wholly unreliable and inconsistent appraisal and purchase methodology.  The degree of subjectivity and the dollar amounts involved leave the door wide open to fraud, waste, and abuse (and at very least, the perception thereof, which can be its own problem).

Even so, it's a better use of the funds than handing it over to Ron Gettelfinger or Larry Flynt, so perhaps I'll just keep quiet.