Wednesday, November 12, 2008

TARP Scraped
Treasury Secretary Paulson announced this morning that the Treasury is scrapping plans to acquire troubled assets from banks, and will use the portion of the $700 billion bailout allocated to troubled assets to instead continue to invest directly into banks. This will improve banks' capital structures. The government is also giving explicit instructions to banks to start lending to businesses and consumers. My immediate opinion of this change in plan tells me that the Treasury determined that the troubled assets have little or no value, and the government's acquisition of these assets would be a financial disaster for taxpayers. Since the assets apparently have no value, the banks need write the assets off and start selling them for whatever they can garner on the open market. This will help clean the banks' balance sheets and inject additional cash into the banking sector.

2 comments:

investdoc said...

I am somewhat disappointed at the announcement. The Resolution Trust Company model is no longer an option. Plus, providing capital to operating institutions will likely provide the excuse for further meddling in operations (which is one large factor in getting into the current situation). Bloomberg also has a story that says that Paulson specifically intends that TARP will target consumers as opposed to businesses. I'm not so sure that I can get excited about the change in strategy.

Rational Realist said...

The market sure did not like the news. The impression is that, like in late September, Treasury appears to be throwing darts and hoping something sticks. To me the troubled assets have no value, and should be prices accordingly. CDSs need to be valued at $0, too, and Wall Street needs to move forward. CDSs, as I now understand them, seem like a B.S. deal anyway.