Will the Treasury Get TARP Act 2 Right This Time?
Following a request by President-elect Obama, President Bush asked Congress last week to release the second tranche of the Troubled Assets Relief Program (TARP). Obama wanted to have the money handy in case of an emergency or further weakening of the financial system and the economy as he assumes office on the 20th. Fed Chairman Ben Bernanke said earlier that Obama’s proposed stimulus plan was necessary but not sufficient in itself to get the economy out of the current malaise.
Congress and just about everyone else has been very upset with the way Treasury Secretary Hank Paulson has administered the first $350 billion of TARP. TARP funds were originally supposed to buy the toxic assets, i.e. the worthless (or nearly so) mortgage-backed securities bankrupting financial institutional stalwarts impacting the whole financial and credit system. However, after declaring that to be the plan when seeking money from Congress, Paulson abruptly changed course in November and used the money instead to buy equity in financial institutions.
Paulson cited speed and scope as his reasons at the time. Speed in that the cash infusion could be carried out much quicker to try to stabilize the financial system before a potential collapse. And scope in that dollar for dollar cash investment would provide a much bigger bang to the financial system than asset purchase.
Treasury’s management and oversight of the program has been pathetic though. It has no metric to track the flow of money through the recipients, or to assess the efficacy of the infusion in increasing lending, the raison d’être for TARP. And, the Treasury has gotten very little from the financial corporations in return for the cash infusion it gave them compared to what private investors like Warren Buffett got from Goldman Sachs for example.
Meanwhile, banks continue to hold hundreds of billions of dollars of risky mortgage-backed securities, which is a continuing cause of systemic credit malfunction. And, foreclosures continue unabated because the Treasury and the other arms of Bush administration have not done anything substantial to deal with foreclosures.
May be Paulson thought the system will self-correct over time. Left to itself, that could happen but the cost of such self correction over a long period of time could be devastating. May be, he thought it wasn’t his bidding to do it all in the time he had. May be, given his background as ex Goldman Sachs’ chief, he was focused disproportionately on the solvency of the financial behemoths.
Whatever may have been the reasons, I believe that the toxic assets have to be sequestered and foreclosures have to be dealt with, so no more mortgage-backed securities turn toxic to steer the nation away from the path to financial and economic health. The continuing foreclosures threaten bank solvency, depress home prices for all including solvent homeowners, stunt housing construction industry, and worsen the recession.
Tim Ryan of the Securities Industry and Financial Markets Association trade group in Washington has called for a return to TARP classic, the original TARP attempt to buy off banks’ toxic assets. At the same time, I think it is also very important to make an attempt to salvage home mortgages that are salvageable with some limited efforts to stop the continuing foreclosure hemorrhage.
TARP Tranche 2
Congressman Barney Frank has introduced legislation to amend the original TARP as a condition to releasing the second tranche of $350 billion under TARP. His bill offers significant foreclosure relief besides including significant oversight and accountability measures on TARP disbursements. The bill calls for spending at least $40 billion and up to $100 billion on foreclosure relief for affected homeowners.
If the bill does become law, it should significantly stem the tide of foreclosures. It will also be fair in that the Main Street will finally get some help after the Wall Street was showered with much bigger and quicker help from the government. After all, the Wall Street and the Main Street were equally involved in the financial excesses that caused the housing bubble and the subsequent economic mess.
What do you think?
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