It Isn’t a TARP Without Troubled Assets to Cover: Caroline Baum

Commentary by Caroline Baum

Nov. 19 (Bloomberg) — Every time Treasury Secretary Hank Paulson updates us on the government’s efforts to stabilize the financial system and announces the latest twist in the Troubled Asset Relief Program, I get a sinking feeling in my stomach.

I know he will introduce a host of new acronyms for new lending facilities to rescue new asset classes from new and anticipated distress.

And I know that, no matter how hard I focus on what he says or how many times I read the press release and accompanying stories, I won’t be able to get my arms around the details.

And then it hits me. There are no details. Only a set of loosely linked concepts — something between a trial balloon and a hot-air dirigible — that flows out in a stream-of- consciousness format, with the details to be filled in later.

There were no details when Paulson delivered a three-page draft of a bailout proposal to Congress in September, authorizing him to spend $700 billion buying “troubled assets” from banks, with no questions asked and no provision for oversight.

There were no details when Paulson announced in October that he was shifting gears and using the congressionally authorized funds to recapitalize the banks, a provision of the Emergency Economic Stabilization Act of 2008 and an option Paulson had dismissed weeks earlier in favor of buying troubled assets through some kind of reverse auction.

Now there’s a detail you can hang your hat on! Too bad it was a non-starter.

Comparative Disadvantage

“Treasury has no expertise in this ridiculous new venture,” wrote Vernon Smith, Nobel Laureate in Economics, in an Oct. 9 Wall Street Journal op-ed.

Treasury is really good at auctioning securities of a single description and maturity to multiple competing buyers. With a reverse auction, the sellers submit competitive offers at which they want “to sell Treasury a heterogeneous mix of good, some sour, apples and oranges whose content is better known to sellers than the Treasury,” Smith wrote.

Last week, Paulson announced that TARP, the program for buying troubled assets, was dead. (How can you have a TARP without the “T” and the “A?”) In its reincarnated form, the program will be reoriented toward helping the consumer.

There were no details.

“We’re in the process of working with the Fed to design it,” Paulson said at a Nov. 12 press briefing.

As a practical matter, what is he going to do?

Movin’ On

That’s unclear. He spoke about distress in the “asset- backed securitization market,” where credit-card, auto and student loans are packaged and resold. He said he was “exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities” and using TARP “to encourage investors to come back to this troubled market, by providing them access to federal financing while protecting the availability for consumers.”

Got it? By the time you figure out what he’s exploring, encouraging, providing and protecting, TARP will have moved on to bigger and better things.

In the process, “Paulson managed to blow up several markets in one press conference,” said Jim Bianco, president of Bianco Research in Chicago.

Mortgage bonds were clobbered as Paulson called off the stillborn purchase of troubled mortgage-related assets. “The asset-backed market for credit cards and auto loans is in chaos, with folks watching TV and waiting for the announcement of how the government is going to accomplish these things,” Bianco said.

Flipping and Flopping

Instead of apologizing for his flip-flop on one after another ill-conceived initiative, Paulson prided himself on his flexibility.

“I will never apologize for changing a strategy or an approach if the facts change,” he said, paraphrasing the late economist John Maynard Keynes.

The facts haven’t changed, Mr. Secretary. Your appreciation of and approach to them have.

“I’m afraid Paulson is applying Don Rumsfeld’s approach to the financial world,” said Josh Rosner, managing director at Graham Fisher & Co. in New York. “Rumsfeld’s core tenet was that sometimes you can’t predict outcomes, so just put the ball in motion. That approach is irresponsible.”

To the extent that confidence — in the financial system, in counterparties to transactions, in government officials setting policy — is important, Paulson instills little.

“What are the rules?” Bianco said. “He’ll get back to you on that.”

Off the Dole

From the nuanced decision to rescue Bear Stearns Cos. and let Lehman Brothers Holdings Inc. fail, to the constantly changing vision for TARP, to the failure to enunciate the rules of the game, to the opaque selection of winners and losers for loans and rescues, Paulson has failed to elicit the market’s — or public’s — trust.

“The general concern that many of us have voiced on both sides is the federal government picking winners and losers in this process,” Congressman Tom Price, Republican of Georgia, said at yesterday’s House Financial Services Committee hearing.

Price said there’s a “general angst” in Congress and across the nation about the federal government’s ability “to get this right.”

No one is talking about how to get things right when it comes to the status quo ante.

“How will we ever get back to a world where the government is not expected to backstop short-term debt?” Rosner said, referring to the Fed’s Commercial Paper Funding Facility. “Allowing corporations to fund themselves with short-term debt is like funding housing with short-term adjustable-rate mortgages.”

We all know how well that worked out.

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