Page 2 of 2 TARP flip-flop true to form
By Julian Delasantellis
being implemented, why the toxic securities were not being bought up. Press
reports at the time had it that there were still significant debates inside
Treasury over what price the securities would be bought out at, and what form
of auction mechanism would be employed to generate those prices. More recently,
it has been revealed that part of the funds needed to rescue insurance giant
AIG were coming from the TARP.
What was really happening here was that Paulson, like a child with a TV remote
control switching through all the channels, had a very short attention span.
Just weeks after he begged for it as the
financial world's salvation, his mind was wandering away from the TARP.
Britain's financial system was, and still is, as impaired as America's or more,
but their chief economic official, Chancellor of the Exchequer Alasdair
Darling, chose not to follow along the lines of the US with a TARP-like
initiative. On October 8, he announced a 50 billion pound plan to actually take
equity positions in eight British banks, most prominent among them Barclays,
RBS, Lloyd's, and HBOS.
Back over in America, the Darling plan was welcomed like a breath of fresh air
- why waste money on mortgage securities of questionable worth when the
government, taxpayers, could get actual shares in banks that could appreciate
in value when or if, the economy and bank share prices improve? New York Times
columnist Paul Krugman was particularly effusive in praise of the Darling plan,
and dismissive of TARP; when he won the Nobel Prize in economics on October 13,
it was just one more nail in TARP's quickly closing coffin.
On October 14, Paulson went before the press and said it was a Treasury
secretary's prerogative to change his mind. The troubled-asset component of
TARP would be put off in favor of immediate injections of capital into
America's banks, in the form of $125 billion to go to eight large money-center
banks, and $125 billion to go to smaller, regional banks. This would be
accomplished by forcing the banks to sell the government preferred, non-voting
shares in their companies.
"We must restore confidence in our financial system," Paulson declared. "The
first step in that effort is a plan to make capital available on attractive
terms to a broad array of banks and thrifts, so they can provide credit to our
economy. From the $700 billion financial rescue package, Treasury will make
$250 billion in capital available to US financial institutions in the form of
preferred stock ... We expect all participating banks to continue and to
strengthen their efforts to help struggling homeowners who can afford their
homes avoid foreclosure."
Paulson "expected" banks "to strengthen their efforts to help struggling
homeowners who can afford their homes avoid foreclosure", but, unlike the
British plan, there was no actual requirement for the banks receiving the
government funds to actually make new loans. Here, the right-wing ideologues in
the Bush administration seemed to be making one last stand before moving into
their much smaller offices at the Heritage Foundation, reacting with absolute
indignation to the concept that the government might know better what to do
with the government's money than unfettered free enterprise.
As the markets achieved a very tenuous stability in late October, Paulson was
quick to claim success for his "Capital Purchase Program", although many other
observers contend that the credit should more rightfully go to the initiatives
by Bernanke and Federal Deposit Insurance Commission Sheila Bair to guarantee
all bank deposits up to and including commercial paper (see
Soulmates in latte land, Asia Times Online, October 16 2008).
Swelled and stuffed full with pride and hubris, Paulson buried the TARP on
November 12. The US media, busy on 24/7 Obama puppywatch, took little notice of
this; they didn't understand the TARP during its brief existence, and so
couldn't care less about its demise. The markets, on the other hand, did
notice. All of a sudden, the wailings of protest that accompanied the TARP's
creation and existence grew absolutely deafening once everybody got their wish.
In just the six trading days since Paulson's burial of the TARP, the S&P's
BIX bank stock index has fallen 16%. Among some of the large banks that would
have had illiquid mortgage securities lifted out of their portfolios by the
TARP, things are much worse. Shares in Goldman Sachs are down 26% in just that
time, Citigroup just under 50%.
So much for the hope of the equity purchases proponents that the government
expenditures involved in procuring the shares would be recouped when bank
stocks rallied.
Proving the old adage that absence makes the heart grow fonder, at a conference
of US corporate chief executive officers on Tuesday, the CEOs named "buying
illiquid assets, the core strategy of the now departed TARP, as the number two
preferred government policy emphasis, right behind stimulating the economy".
With over 60 days until the inauguration of Barack Obama as president,
government policy to deal with the worst financial crisis since the Great
Depression looks listless and rudderless, and the markets are selling off as a
result.
Unlike a parliamentary system such as Britain's, where changes in governments
occur within a week of an election, America's government still operates under
the constitutional mandate of an over two-month interregnum between election
and inauguration; before the Twentieth Amendment to the US constitution was
adopted in 1937, inauguration of a new president occurred all the way out on
March 4. The old rationale for the delays was to allow officials from all over
the country to make it to the nation's capital by horse, then by train, a
concern obviously outdated in the jet age.
The delay might not be so dangerous had the officials remaining in power until
the new regime's assumption of power been proving themselves efficient and
competent. But in the volte face over TARP, Paulson, and by extension Bush, are
proving to be neither. Had they settled on one policy and stayed with it, be it
TARP or asset purchases, things would have been infinitely better than now. The
markets could then have had confidence and assurance that there was a firm hand
at the economic helm, something solely lacking now.
Beyond the immediate need for leadership, the contretemps over TARP makes
certain what will be written for Bush administration's epitaph - that it was
absolutely incompetent. Starting with, but not limited to, the bungling over
the Iraq occupation and Hurricane Katrina, it has almost been as if the Bush
administration, whether through indifference or direct design, has deliberately
worked to sabotage its own efforts at effective government administration. The
laissez-faire conservatives in power the last eight years have always contended
that government couldn't do anything right; look to what extent they have gone
to prove their point.
At a post-election meeting of Republican governors last week in Miami, former
McCain vice-presidential nominee and current Alaska governor Sarah Palin once
again excited the Republican base and, in so doing, claimed the post as an
early favorite for the 2012 Republican presidential nomination. Another
possible contender, Minnesota governor Tim Pawlenty, tried a different tack. He
claimed that Republicans must work to prove that they can administer government
effectively; as proof of his competence in this, he proudly proclaimed his
success in reducing wait times for those seeking to renew driver's licenses in
his state. Not as exciting as all the raw red meat (moose and others) Palin
delivers to the base, but, unless Obama falls flat on his face, the Bush record
of absolute incompetence should hobble Republican national aspirations for many
years to come.
The next two months might be very rough on the markets. The Bush administration
could possibly come up with an Earth-shatteringly good idea to save the day;
then again, I never put much stock on betting on longshots.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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