The TARP is Dead, Long Live the TARP

This weekend the TARP entered generation three: an asset guarantee program. Just a couple of weeks after announcing that the TARP will not undertake asset purchases, the TARP is being used as a stop loss mechanism for Citi. While the move is not bad, per se – although it is hard to believe that it will be sufficient given recent releases suggesting UBS will have to go back to the trough – it is just another throe of inconsistent policy over the past year-and-a-half.

Recall the laundry list of “creative” policymaking. From Treasury’s MLEC SuperSIV to HopeNow, the BearStearns/JPMorgan bailout, the Fannie/Freddie, Lehman and AIG debacles, and now TARP I (asset purchases), TARP II (recapitalizations), and TARP III (asset guarantees). Note, however, how none of these address the financial system as a whole but only treat individual institutions or idiosyncratic problems.

Systemic solutions, i.e., reliance on bond ratings, off-balance sheet treatment of both securitizations and derivatives (including CDS), and CDS counterparty exposures (not clearing mechanisms) have still not been approached. Nor can they be expected to be approached with the torch of leadership being passed from Secretary Paulson to another Wall Street Insider, Timothy Geithner. Banks like Geithner (indeed, they hired him to be President of the Federal Reserve Bank of New York) because he delivers the bailouts they like without the nasty stabilizing regulation that may hurt profits. When Washington figures this out, there may be hope.

Perhaps there is hope to be found overseas. I am going to turn my attention to Europe next week, testifying at an EU Parliament work session on Ratings Agencies. Nonetheless, the Commentary will not publish this Tuesday due to travel, and will resume December 9. Happy Holidays to all, and give thanks for real economic analysis.

7 Responses to "The TARP is Dead, Long Live the TARP"

  1. Anonymous   November 25, 2008 at 11:19 am

    How does one reconcile your assessment (with which I agree)of Geither as Treasury Secretary with Roubini’s glowing admiration for Geither and Summers?

  2. Al Havermann   November 25, 2008 at 12:06 pm

    So, is it time to short the dollar?

  3. Constructe   November 25, 2008 at 7:53 pm

    Until regulation exposing the liability of the 40 trillion CDS and regulating it going forward happens, there is no reason to trade with, support, or loan to any bank or financial institution. Unless government acts on this the lie (liabilility) will hang over the market killing everyone starting with insurance companies with AIG who got dumped with a lot of JP Morgan and Goldman CDS position. TARP = transactions approved for rich panderers (chiefly big banks, Goldman, and JP Morgan).Stop playing hide the easter egg with CDS liability. Find out the irresponsible ones, close them out and re-capitalize the remaining ones. Just because Goldman, Citi, and JP Morgan are the CDS felons, does that mean the US must suffer years of pain as they try to unwind their position while the government allows them to hide their liabilities from their balance sheet (making everyone fear everyone is holding trillions of hidden CDS and CDO liability). It doesn’t take a brilliant economist to figure out what’s going on here. And it stinks.

    • LWG   November 26, 2008 at 10:23 am

      Amen,You certainly have exposed the farce being played out. Until the 40T CDS situation is brought to transparency; the whole financial system and the country will not acheive any meaningful stability.Hopefully, the new rules coming from the FDIC will force the CDS felons to fess up.

    • LWG   November 26, 2008 at 10:23 am

      Amen,You certainly have exposed the farce being played out. Until the 40T CDS situation is brought to transparency; the whole financial system and the country will not acheive any meaningful stability.Hopefully, the new rules coming from the FDIC will force the CDS felons to fess up.

  4. Anonymous   November 26, 2008 at 12:11 am

    Amen Brother

  5. Anonymous   November 26, 2008 at 1:49 am

    I have not felt like this since the OJ trial. The evidence was all there and he got off. TARP (and Market flux)keep you focused on one thing while in the background the Fed and FDIC are committing another $7.6tr on commercial paper, GE, Freddie & Fannie, et al. Where is the oversight?